**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Form
        10-KSB/A**





(Mark
      One)





x
      ANNUAL REPORT UNDER
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


FOR
      THE
      FISCAL YEAR ENDED DECEMBER 31, 2007





o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF
      1934


FOR
      THE
      TRANSITION PERIOD FROM __________ TO __________


COMMISSION
      FILE NUMBER ________________________________





**PHANTOM
      FIBER CORPORATION**


(Name
      of
      small business issuer in its charter)





**DELAWARE**
            
            **04-2451506**(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)




**144
      Front Street, Suite 580, Toronto, Ontario, Canada M5J
      2L7**


(Address
      of principal executive offices) (Zip Code)





Issuer’s
      telephone Number: **(416)
      703-4007**





Securities
      registered under Section 12(b) of the Exchange Act: None.





Securities
      registered under Section 12(g) of the Exchange Act: Common Stock, $.001 par
      value





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act.  ̈





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes **x** No  ̈





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB.  ̈





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes  ̈ No
**x**





State
      issuer’s revenues for its most recent fiscal year. $495,285





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates, computed by reference to the average bid and asked price of
      such
      common equity as of April 10, 2008, was $5,874,634.





As
      of
      April 10, 2008, the issuer had 18,950,433 outstanding shares of Common
      Stock.





**DOCUMENTS
      INCORPORATED BY REFERENCE: NONE**





Transitional
      Small Business Disclosure Format (check one): Yes  ̈ No
**x**









**Phantom
          Fiber Corporation**
 
 **EXPLANATORY
          NOTE**
  This
          Amendment No. 1 on Form 10-KSB/A amends our Annual Report on Form 10-KSB
          for the
          year ended December 31, 2007 (as initially filed with the Securities and
          Exchange
          Commission on April 15, 2008) and is being filed to correct typographical errors
          made
          in the initial filing.









**TABLE
      OF CONTENTS**




**Page****PART
                  I**Item
                  1.
              Description
                  of Business
              1Item
                  2.
              Description
                  of Property
              4Item
                  3.
              Legal
                  Proceedings
              4Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              4**PART
                  II**Item
                  5.
              Market
                  for Common Equity and Related Stockholder Matters and Small Business
                  IssuerPurchases
                  of Equity Securities
              5Item
                  6.
              Management’s
                  Discussion and Analysis or Plan of Operation
              7Item
                  7.
              Financial
                  Statements
              15Item
                  8.
              Changes
                  In and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              15Item
                  8A(T)
              Controls
                  and Procedures
              15Item
                  8B.
              Other
                  Information
              15**PART
                  III**Item
                  9.
              Directors,
                  Executive Officers, Promoters and Control Persons and Corporate
                  Governance: Compliance
                  With Section 16(a) of the Exchange Act
              16Item
                  10.
              Executive
                  Compensation
              18Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              22Item
                  12.
              Certain
                  Relationships and Related Transactions and Director
                  Independence
              24Item
                  13.
              Exhibits
              25Item
                  14.
              Principal
                  Accountant Fees and Services
              26**SIGNATURES**
              
              28









**PART
      I**





**Item 1.** **Description
        of Business.**





**Organizational
      History**




On
      July
      7, 2004, pursuant to a Share Exchange Agreement entered into as of April 21,
      2004, the Company (“Phantom Fiber Inc.”) acquired Phantom Fiber Corporation, a
      Canadian corporation ( ***“Phantom
      Fiber Canada”*** ),
      and
      its wholly owned subsidiary, Phantom Fiber Inc., also a Canadian corporation.
      Pursuant to the Share Exchange Agreement, the Company issued 137,410,735 shares
      of common stock (before giving effect to a one-for 20 reverse stock split on
      May
      5, 2005) to the shareholders of Phantom Fiber Canada and 30,000,000 shares
      of
      common stock and warrants to purchase 15,000,000 shares of common stock (before
      giving effect to a one-for 20 reverse stock split) to debenture holders of
      Phantom Fiber Canada in exchange for all of the issued and outstanding shares
      of
      capital stock of Phantom Fiber Canada and subordinated convertible debentures
      of
      Phantom Fiber Canada.




The
      Company conducts its business through its wholly owned subsidiaries in Canada,
      being Phantom Fiber Corporation and Phantom Fiber Inc. Phantom Fiber Inc. was
      incorporated in the province of Ontario in February, 2002. Throughout this
      report, references to “Phantom Fiber,” the “Company,” “we,” “us,” and “our”
refer to Phantom Fiber Corporation together with its wholly owned
      subsidiaries.





**Overview**




Phantom
      Fiber is a developer of wireless software applications and mobile solutions
      that
      empower enterprises with high-performance functionality on today’s mobile
      devices and global communication networks. The Company has developed a wireless
      platform and supporting software developer kit that extends the rich multimedia
      content and user experience of existing Internet web sites securely and
      instantly to a broad range of PDA’s and mobile phones. While applications based
      on this platform can be applied to any enterprise requiring a mobile solution
      they have been most successful with clients that require speed and a rich user
      experience in their mobile solutions. Potential applications include remote
      monitoring of facilities, stock research, real time quoting and transacting,
      logistics and distribution, health care (including real time distribution of
      secure patient information), gaming and entertainment, and live streaming video.




Phantom
      Fiber derives revenue through the sale of its proprietary software and custom
      integration services. The Company’s business model generates initial revenue
      from integration and customization services and recurring revenue from
      usage-based licensing. The Company combines a low implementation cost with
      a
      rapid deployment strategy using reusable software objects to reduce initial
      purchase barriers. Once deployed, the platform utilizes Phantom Fiber’s
      proprietary Smart StreamingTM data transmission technique to deliver high-speed
      client side performance that intuitively adapts to device and network
      properties. Information is securely encased and delivered with complete
      end-to-end encryption on a variety of handset operating systems including Java,
      Palm, SmartPhone, Research In Motion, Apple, i-Mode, Symbian and Windows CE
      platforms.




With
      the
      ability to offer rich graphics and high transaction speed, the Company’s initial
      market strategy was to enter into the e-gaming market. This industry was
      attractive since it is a rapid adopter of new enabling technologies and
      currently has no single significant provider of wireless solutions. In the
      latter half of 2006, the Company began defining its plans to extend its
      marketing strategy into the financial and enterprise software markets. It had
      also begun expanding on its previously developed video streaming software with
      the intent of expanding its market penetration into the security monitoring
      and
      surveillance markets. Throughout 2007 the Company began capitalizing on these
      efforts. The video components became an integral part of the pari-mutual
      application and was instrumental in
      Phantom Fiber securing several related contracts. The Company also expanded
      its
      functionality to address the requirements of the financial sector and enterprise
      markets. These too resulted in major contracts in 2007.




Generally,
      the Company charges a one-time integration fee to implement and customize the
      product to match the functionality of the client’s Internet offerings. For
      clients with a potential client base or reach in excess of 10,000 users in
      which
      a service charge or transaction fee exists, Phantom Fiber also participates
      in
      that revenue stream via a revenue sharing or monthly subscription type
      commercial arrangement.




1


**Our
      Wireless Platform**




The
      Company’s wireless platform is built using a building block or object approach.
      The technical architecture was chosen to protect performance and ensure
      scalability on the device. Mobile devices commercially available at this time
      do
      not yet have the storage, memory, and computing power of a personal computer.
      Phantom Fiber created this object oriented programming structure and framework
      to ensure functional autonomy of its platform. Some of the primary features
      of
      the platform are listed below:




***Enhanced
      user experience:*** The
      wireless framework offers a rich graphic experience without compromising on
      performance. This is the primary reason the gaming sector has embraced the
      technology. The visual presentation is available today and can be deployed
      on
      existing wireless data networks.




***Cross-platform
      & Network compatibility:*** **** The
      client-side software supports Windows/CE, Palm, Symbian, Apple, i-Mode, RIM
      Blackberry, SmartPhone and Java-enabled phones (J2ME). This cross-platform
      compatibility eliminates the need to recompile the application for devices
      running different operating systems, using different devices and running on
      different network protocols. The solution is network carrier independent.
      Therefore solutions can be deployed and run globally with various network
      providers without any change to the software. Being device and network agnostic
      is a key marketing feature for allowing the product to run on multiple wireless
      network carriers, device manufacturers, and content providers. Phantom Fiber
      currently supports over 1,500 different device types and runs on over 600
      network carriers around the world.




***Performance:*** Current
      browser or WAP based solutions format the presentation prior to transmission
      and
      then send the entire screen layout across the wireless network to the wireless
      device. The result is long delays between responses and inquiries. With Phantom
      Fiber’s data communication technology and client-side software, the client can
      deliver Internet type speed across networks. This approach puts less demand
      on
      the server and network and allows the Company to provide the user with improved
      performance and better graphic presentation.




Some
      of
      the other features inherent to the framework include a number of unique and
      proprietary functions such as:




 ̈
            *Secure
                State Management*–
                Maintains a checkpoint connection in “no signal” areas. Should a user lose
                signal for a period of time, their mobile device will auto refresh
                once a
                connection is re-established. This function takes place without any
                action
                required by the user.




 ̈
            *Security*–
                The communication component of the Company’s software uniquely delivers an
                end-to-end encrypted secure solution over a secure socket layer (SSL)
                similar to secure internet sites. By eliminating reliance on the
                browser
                and the network gateway, there is an increase in both security and
                performance while simplifying the technical
                implementation.




 ̈
            *SmartStreamTM*–
                Communications are handled using a proprietary raw data format to
                provide
                landline Internet speed on today’s wireless devices. SmartStream also
                queues and prioritizes transmissions to assure the quality of user
                experience and application
                responsiveness.




 ̈
            *Client
                Libraries*-
                Presentation graphics and animation are stored in local device libraries
                eliminating redundant delivery and creating a vivid user experience
                without compromising performance.




 ̈
            *Store
                & Forward*–
                Users without wireless connectivity or in a weak signal area can
                continue
                to use Phantom Fiber’s software through a local storage method. The
                software incorporates an encrypted database on the device that can
                be
                synchronized once a signal is detected. This allows enterprise customers
                the ability to continue collecting or referencing information from
                their
                mobile device and not hinder the work flow process.




**Market
      Strategy**




In
      implementing its initial strategy, Phantom Fiber established the following
      criteria:




·
            Users
                were likely to be “early adopters” of wireless technologies;




·
            There
                was no dominant competition apparent to Phantom Fiber;




·
            The
                Company could implement a stable recurring revenue model;
                and




·
            Focus
                on consumer based applications that would take advantage of the
                portability of the product.




2





Based
      on
      these factors, the Company initially targeted the entertainment and gaming
      markets. With a clear and dominant presence in this vertical market over the
      past year the platform and its feature suite has become more robust. These
      features are now being mapped to the characteristics of other vertical markets
      such as the financial services sector, the video delivery and surveillance
      sector and the large enterprise application markets with emphasis on transaction
      support and processing and a requirement to support a wide variety of handset
      types.





**Competition**




The
      wireless applications market is highly competitive and characterized by frequent
      product introductions, evolving wireless platforms and new technologies. As
      demand for applications continues to increase, Phantom Fiber expects new
      competitors to enter the market and existing competitors to allocate more
      resources to develop and market applications. As a result, competition in the
      wireless applications market will intensify.




The
      Company divides the current and potential competition in the wireless
      applications market into three groups: focused providers, gaming specific
      providers and systems integrators. Each of these groups is described
      below.




***Focused
      Providers:*** These
      are companies that have built a wireless set of tools to address the needs
      of a
      specific vertical market. Currently most of the competition in this sector
      consists of micro-browser based products with the majority of their revenue
      derived from infrastructure and ongoing professional services. For these
      companies to adapt their offering to next generation devices would require
      re-architecting the way they conduct business risking a loss of the
      infrastructure and professional services components of their business. They
      have, to date, focused on financial institutions or carriers for market
      penetration. These competitors include Firethorn, Mfoundry, Infowave, 724,
      QuoteMedia and iAnywhere by Sybase, among others.




***Gaming
      Specific Providers:*** There
      are a number of SMS and WML game providers in today’s market, including Phantom
      EFX (a client of Phantom Fiber), Cellectivity, TIM.WE, Spin 3, Mfuse, and
      Airborne Entertainment. The Company believes these gaming specific providers
      have low penetration into the real time gaming environment due to risk of
      security breaches and latency issues inherent to SMS and WAP as well as
      technical restrictions that exist on the handheld devices. Further, these
      companies often sell their own games and content thereby competing with the
      existing internet gaming software providers who prefer to offer their own games.
      Phantom Fiber does not produce content including games preferring to facilitate
      the existing ones.




***Systems
      Integrators:*** Custom
      solutions will still consume some of the wireless applications market share
      as
      large organizations continually try to build ground-up solutions for each
      client, under the assumption that wireless is easy and can be built without
      the
      aid of tools and wireless platforms. These companies include IBM, Bearing Point,
      Oracle, EDS, Accenture, CGI and BEA Systems. Phantom Fiber plans for some
      systems integrator companies to become future clients and value added resellers
      of its suite of products.




With
      any
      growing and expanding market new competitors will emerge. The Company believes
      this is particularly true in the wireless market due to the prevalence of open
      standards and trend towards the consolidation of computing power with telephone
      handsets.





**Government
      Regulation**




Together
      with our gaming and entertainment licensees, the Company is subject to various
      domestic and foreign laws applicable in the jurisdictions in which each company
      operates. At the present time, the Company’s gaming related software clients
      sell directly to licensees that hold government licenses to operate Internet
      gaming sites. Gaming regulations are based on policies that are concerned with:
      (i) the prevention of unsavory or unsuitable persons from having a direct or
      indirect involvement with gaming; (ii) the establishment and maintenance of
      responsible accounting practices and procedures; (iii) the maintenance of
      effective controls over the financial practices of licensees, including the
      establishment of minimum procedures for internal fiscal affairs and the
      safeguarding of assets and revenues, providing reliable record keeping and
      requiring the filing of periodic reports with the governing jurisdictions;
      (iv)
      the prevention of cheating and fraudulent practices; and (v) the provision
      of a
      source of government revenue through taxation and licensing fees.




Some
      jurisdictions have introduced regulations attempting to restrict or prohibit
      Internet gaming, while other jurisdictions have taken the position that Internet
      gaming is legal and/or have adopted or are in the process of considering
      legislation to regulate Internet gaming. For example, the United Kingdom intends
      to establish a regulated market for online gaming. The Isle of Man and Alderney
      - both part of the British Isles - already have fully regulated environments
      for
      Internet gaming, based on high standards consistent with land-based gaming.
      Some
      European countries, including Italy, Germany and Holland where there are
      state-owned monopolies, are taking action aimed at banning foreign online gaming
      operators but facing resistance as it is being viewed as unfair foreign trade
      policies. Such actions by these European Union member states are in contrast
      with a favorably viewed ruling from the European Court of Justice and have
      prompted the European Commission to look at creating new legislation that could
      harmonize online gaming within the European Union, in line with the European
      Commission’s goal to encourage a free and open cross-border market.




3


Since
      companies and consumers involved in Internet gaming are located around the
      globe, including Phantom Fiber’s clients’ licensees and their players, there is
      uncertainty regarding which government has authority to regulate or legislate
      the industry. In recent months the United States has restricted internet
      wagering. It has passed legislation in October, 2006 which focuses on internet
      wagering activity in a play for real money mode. Online lotteries, fantasy
      wagering, and horse racing remains legal in most States. This had an indirect
      affect on Phantom Fiber. Although Phantom Fiber does not directly engage site
      operators, or have mobile games, content, payment processing or other gaming
      related technology; the new legislation had an overall global affect on the
      market. In direct response to this new legislation, Phantom Fiber has redirected
      a significant amount of its sales and marketing efforts to the European and
      United Kingdom markets which has resulted in an increase in our market
      penetration in those areas. Phantom Fiber also focused attention in the
      pari-mutual and lottery sectors as they are clearly “carved out” of the new
      gaming legislation and made significant progress into both of the sectors over
      the past year. The recent passing of the gaming legislation may also result
      in
      the adoption of additional new laws or regulations relating to mobile, or
      particular mobile applications or interpretations of existing laws, which could
      decrease the present growth in use of mobile applications, decrease the demand
      for the Company’s products and services, increase its cost of doing business or
      could otherwise have a material adverse affect on its business, revenues,
      operating results and financial condition. The Company has also focused a
      significant amount of its sales and development efforts in non-gaming related
      vertical markets such as the financial sector, healthcare and other enterprise
      markets in order to diminish any impact gaming related legislation will have
      on
      the capacity for the Company to generate revenue.





**Employees**




As
      of
      March 31, 2008 the Company had 25 full time employees and no part time
      employees. The Company has made it a priority to build and maintain a good
      working environment for employees. Turnover rates have been low and employees
      are active in referring their colleagues to the Company. The Company considers
      relations with its employees to be good. The overall number of staff employed
      by
      Phantom Fiber decreased by two in 2007 as compared to 2006.





**Item
        2.** **Description
        of Property.**




The
      Company maintains its corporate executive office at 144 Front Street, Suite
      580,
      Toronto, Ontario, Canada M5J 2L7. The offices are leased and are comprised
      of
      4,788 square feet, with a monthly rental of $4,389, expiring in April 2009.
      The
      company maintains a sales office in Costa Rica with a monthly rental of $3,000,
      expiring October 2009. The company also maintains an office in New York and
      pays
      a monthly fee of $285.





**Item
        3.** **Legal
        Proceedings.**




The
      Company is not a party to any pending legal proceeding, nor is its property
      the
      subject of a pending legal proceeding, that is not in the ordinary course of
      business or otherwise material to the financial condition of its business.
      None
      of the Company’s directors, officers or affiliates is involved in a proceeding
      adverse to its business or has a material interest adverse to its
      business.





**Item
        4.** **Submission
        of Matters to a Vote of Security Holders.**




No
      matters were submitted for a vote during 2007.




4


**PART
      II**





**Item
                  5.**
                **Market
                    for Common Equity and Related Stockholder Matters and Small Business
                    Issuer Purchases of Equity
                    Securities.**





**Market
      Information**




The
      Company’s common stock is currently quoted on the OTC Bulletin Board under the
      symbol “PHFB.” For the periods indicated, the following table sets forth the
      high and low bid prices per share of common stock. These prices represent
      inter-dealer quotations without retail markup, markdown, or commission and
      may
      not necessarily represent actual transactions.




2008
            
            2007
            
            2006Quarter Ended
            
            High
            
            Low
            
            High
            
            Low
            
            High
            
            LowMarch
                31
            
            $
            0.38
            
            $
            0.22
            
            $
            0.57
            
            $
            0.19
            
            $
            0.70
            
            $
            0.45June
                30
            
            
            —
            
            
            —
            
            $
            0.42
            
            $
            0.23
            
            $
            0.62
            
            $
            0.35September
                30
            
            
            —
            
            
            —
            
            $
            0.50
            
            $
            0.31
            
            $
            0.58
            
            $
            0.30December
                31
            
            
            —
            
            
            —
            
            $
            0.49
            
            $
            0.28
            
            $
            0.47
            
            $
            0.20





**Holders**




As
      of
      March 31, 2008, shares of common stock were held by approximately 419
      stockholders of record. The number of record holders was determined from the
      records of the Company’s transfer agent and does not include beneficial owners’
common stocks whose shares are held in the names of various securities brokers,
      dealers and registered clearing agencies. The Company’s transfer agent is
      PacWest Transfer, LLC.




**Dividends**




Phantom
      Fiber has not declared any dividends to date. The Company has no present
      intention of paying any cash dividends on its common stock in the foreseeable
      future, as any earnings will be used to generate growth. The decision on the
      payment of dividends, in the future, rests within the discretion of the Board
      of
      Directors and will depend, among other things, upon earnings, capital
      requirements and financial condition, as well as other relevant factors. There
      are no restrictions in the Company’s certificate of incorporation or bylaws that
      restrict it from declaring dividends.




**Recent
      Sales of** **Unregistered
      Securities**




During
      the fiscal year ended December 31, 2007 and the quarter ended March 31, 2008
      Phantom Fiber issued the below securities without registration under the
      Securities Act of 1933, as amended (the “Securities Act”).




All
      of
      the below unregistered issuances of securities were made pursuant to the
      exemptions from registration requirements provided by Section 4(2) of the
      Securities Act and/or Regulation D, promulgated thereunder. Except as expressly
      set forth below the individuals and entities to which the Company issued
      securities are unaffiliated with it. For each of such sales, no advertising
      or
      general solicitation was employed in offering the securities. The offerings
      and
      sales were made to a limited number of persons, all of whom were accredited
      investors, business associates of the Company or its executive officers, and
      transfer was restricted by it in accordance with the requirements of the
      Securities Act. For each transaction exempt pursuant to Regulation D, each
      of
      the below security holders who were not Phantom Fiber executive officers
      represented that they are accredited and sophisticated investors, that they
      are
      capable of analyzing the merits and risks of their investment, and that they
      understand the speculative nature of their investment. Furthermore, all of
      the
      below-referenced persons had access to the Company’s Securities and Exchange
      Commission filings.




In
      February 2007, the Company issued 80,000 unrestricted common shares as part
      of
      an agreement for document filing services for the next twelve months. The shares
      were valued at the market price at date of issuance aggregating
      $21,600.




In
      February and March, 2007, the Company issued 265,000 unrestricted common shares
      to senior convertible debt holders who exercised their right to convert to
      common shares at $0.50 per share.




5




In
      April,
      May, June and July 2007, the Company issued a total of 1,150,000 warrants to
      purchase common shares at $0.50 per share. The warrants were issued as part
      of
      the cost of financing short-term loans from an unrelated party and valued at
      $301,547 in the aggregate.




In
      June
      2007, the Company issued 22,000 unrestricted common shares to a senior
      convertible debt holder who exercised their right to convert to common shares
      at
      $0.50 per share.




In
      September 2007, the Company issued 203,500 unrestricted common shares at $0.50
      per share, in exchange for the conversion of $100,000 in senior convertible
      debt
      and $1,750 of unpaid interest.




In
      December 2007, the Company issued 60,000 restricted common shares for investor
      relation services. These shares were valued at the fair market value of $0.34
      per share. A total of $20,400 was charged to operations with a corresponding
      credit to equity.




In
      January 2008, the Company issued 330,000 unrestricted common shares to a senior
      convertible debt holder who exercised their right to convert to common shares
      at
      $0.50 per share.




On
      January 15, 2008, the Company sold (a) $973,583 principal amount of new senior
      convertible notes, and (b) warrants to purchase 2,165,674 shares of common
      stock, to seven accredited investors. These convertible notes were paid by
      means
      of security subscriptions received amounting to $182,300, the settlement of
      short term loans payable of $780,000 and settlement of director dividends
      payable in the amount of $11,283. The senior convertible notes bear interest
      at
      1% per annum payable semi-annually. The notes mature two years from the date
      of
      issuance and are convertible into shares of common stock at the investors’
option at $0.50 per share for one investor and $0.42 per share for the remaining
      investors, subject to adjustment. The warrants are exercisable until three
      years
      from the date of issuance. The warrants are exercisable at a purchase price
      of
      $0.50 per share. This transaction was exempt from registration requirement
      pursuant to Section 4(2) of the Securities Act and Rule 506 promulgated there
      under.




On
      February 11, 2008, certain employees exercised their option agreement to
      purchase 90,749 restricted common shares which had previously vested. The
      options were exercised at $0.228 per share.




On
        March
        25, 2008, the Company sold (a) $100,000 principal amount of senior convertible
        notes, and (b) warrants to purchase 238,095 shares of common stock, to an
        accredited investor. These
        convertible notes were utilized to pay $50,000 of short term borrowings existing
        as of December 31, 2007 and an additional $50,000 of short term borrowings
        received in January 2008. The senior convertible notes bear interest
        at 1% per annum payable semi-annually. The notes mature on January 15, 2010
        and
        are convertible into shares of common stock at the investors’ option at $0.42
        per share, subject to adjustment. The warrants are exercisable until three
        years
        from the date of issuance. The warrants are exercisable at a purchase price
        of
        $0.50 per share. This transaction was exempt from registration requirement
        pursuant to Section 4(2) of the Securities Act and Rule 506 promulgated there
        under. On March 25, 2008, the Company issued 238,095 restricted common shares
        to
        this investor who exercised his right to convert to common shares at $0.42
        per
        share.




6


**Item
        6.** **Management’s
        Discussion and Analysis or Plan of Operation.**





**Forward-Looking
      Statements**




This
      form
      10KSB contains" forward-looking statements" within the meaning of section 27
      A
      of the securities act of 1933 and section 21 he of the Securities Exchange
      Act
      of 1934. All statements, other than statements of historical facts, included
      in
      this form 10KSB that address activities, events or developments with respect
      to
      our financial condition, results of operations, or economic performance that
      we
      expect, believe, or anticipate will or may occur in the future, or that address
      plans and objectives of management for future operations, are forward looking
      statements. The words "anticipate," "assume," "believe,"" budget," "estimate,""
      expect,"" forecast," "intend," "plan," "project," "will," and similar
      expressions are intended to identify forward-looking statements. Forward-looking
      statements appear any number of places in this form 10KSB and include statements
      about such matters as:




·
            the
                amount and nature of future capital expenditures and the availability
                of
                capital resources to fund such
                expenditures




·
            our
                ability to attract new customers in new business
                segments




·
            our
                ability to meet future repayment of debt
                obligations




·
            our
                ability to attract and keep quality technology
                personnel




·
            our
                ability to fund future operations including research and
                development




Our
      forward looking statements are based on assumptions and analysis made by us
      in
      light of our experience and our perception of historical trends, current
      conditions, expected future developments, and other factors that we believe
      are
      appropriate under the circumstances. These statements are subject to a number
      of
      known and unknown risks and uncertainties which may cause our actual results
      and
      performance to be materially different from any future results or performance
      expressed or implied by the forward-looking statements. These risks include
      such
      factors as:




·
            the
                availability of capital to us on terms that are attractive to
                us




·
            any
                new government regulations regarding the industries we
                service




·
            the
                possible loss of key personnel




·
            the
                possible failure to repay our outstanding short-term
                indebtedness




·
            our
                ability to compete effectively against other participants in our
                industry




We
      caution you that forward-looking statements are not guarantees of future
      performance and that actual results or developments may be materially different
      from those expressed or implied in the forward- looking statements. Although
      we
      may from time to time voluntarily update our prior forward -looking statements,
      we disclaim any commitment to do so except as required by securities
      laws.




**Current
      Business and Outlook**




Phantom
      Fiber provides a wireless data delivery platform and services that allow users
      to experience internet-like graphics and internet-like speed in an end-to-end
      highly secure solution across numerous mobile devices and network carriers.
      The
      Company’s customers include cellular network carriers, financial institutions,
      and several online gaming, horse racing, fixed odd game providers and sports
      book software companies. The focus for the companies initial 4 years has been
      on
      the gaming and entertainment sector. These clients include Finsoft PLC,
      Real-Time Gaming, Skill4Prizes, Bid Nation Ltd, Digital Gaming Solutions, Kiron
      Interactive, Bet Options, Dynamite Ideas, GTS, Orbis, and Parlay Entertainment.
      The Company also recently signed Scientific Games, Sports Acumen, Churchill
      Downs, YouBet and Phantom EFX in the US and Swiss Lottery and. Electracade,
      both
      of which are European based companies, which broadens its European exposure
      and
      further expands its product offering both geographically and functionally.
      Over
      the past year the Company has expanded its sales and marketing efforts and
      has
      now secured clients in the financial and mobile payments vertical (such as
      FireOne, Citadel, and Navaho Networks), healthcare, logistics and distribution
      software providers, and the security and remote-monitoring industries.




7


Phantom
      Fiber’s licensing models are determined by customers that can sustain a client
      base greater then 10,000 mobile users. In such cases, we typically enter into
      exclusive multi-year, revenue-sharing agreements, under which they use Phantom
      Fiber’s technology to offer services or functions such as games, content or
      various other features with the ability to transact to their existing data
      servers. The subscribers are charged a monthly user fee or percentage of the
      revenues generated from those clients. Phantom Fiber does not produce or
      distribute any game related or wagering software or content, it strictly
      provides a mobile transport layer that delivers encrypted packets over the
      cellular networks on behalf of a hosting client. Phantom Fiber remains a
      wireless transaction enablement company allowing clients to extend functionality
      to mobile devices such as cellular phones. Phantom Fiber has no plans of
      entering the wagering or game related market.




Over
      the
      past 12 months from a technical perspective, Phantom Fiber continued to
      strengthen its core functions such as increasing performance, simplifying usage,
      expanding its device coverage to over 1,500 device types, and providing a more
      robust server architecture to allow clients to remotely monitor the performance
      and condition of the platform to ensure it remains up and running at all times.
      The Company also expanded its platform functionality with stronger video
      streaming technology and other analytical data to further differentiate its
      offering from any competition. It is the Company’s goal for 2008 to further
      exploit these key technical differentiators. Our market positioning in the
      gaming and entertainment sector remains strong as one of the dominant and
      recognized mobile solutions provider. Over the past 12 months the Company has
      secured and completed products in the financial sector. Therefore the goal
      for
      2008 will be to expand geographically and on a product platform basis, further
      into the brokerage, banking and trading markets. With the geographic reach
      of
      our offices and ability to support phones indifferent of type or carrier, we
      believe we will make significant progress in this sector over the next 12
      months. We have also targeted other market sectors that have a demand for not
      only a mobile application, but require the presentation and performance inherent
      to our product..




The
      Company’s goal for this upcoming year will also continue its focus on market
      penetration in vertical markets in which we are recognized. The Company will
      continue to deploy the backlog of sites it has amassed through its existing
      contracts and to work much closer with its partners in assisting them in the
      marketing of a mobile product. Each client signed usually represents several
      operators or sites who license our partners’ software. Therefore, each signed
      partnership agreement requires Phantom Fiber to deploy a number of sites which
      make up the companies backlog. In order to address this backlog the Company
      focused on introducing methodologies and product constructs geared towards
      more
      quickly producing brands for the underlying operators. It has also introduced
      several “ease of use” functions within the product to provide a more simple
      experience to the end user, again with the intent of increasing
      adoption.




These
      financial statements have been prepared on the going concern basis, which
      assumes the realization of assets and liquidation of liabilities in the normal
      course of business, notwithstanding the continuing operating losses and the
      accumulated deficit of $11,786,659 and shareholders’ deficiency of $5,380,909 as
      at December 31, 2007. These circumstances raise substantial doubt about the
      Company’s ability to continue as a going concern without additional capital
      being made available. Management recognizes this and is currently going through
      the process of securing additional capital to allow the company to continue
      operations unhindered. Management’s efforts over the past twelve months have
      also been directed towards the development and implementation of a plan to
      generate sufficient ongoing revenues to cover all of its present and future
      costs and expenses. These efforts have allowed the Company to greatly reduce
      its
      ongoing losses and the Company believes it will be cashflow positive in 2008.
      Therefore management intends to raise sufficient capital to eliminate or greatly
      reduce its current debt and provide sufficient working capital to achieve
      ongoing profitability.




In
      early
      2006 the Company successfully completed a $3.5M convertible debt financing.
      The
      use of these funds has been applied to expand our geographic reach and
      increasing the depth of our technical and sales teams. The Company also
      successfully completed the registration of the underlying shares of common
      stock
      from this financing. Since that time the Company has begun executing on those
      goals. Over the past year Phantom has opened offices in New York and in San
      Jose, Costa Rica. The resources in Costa Rica work closely with several of
      the
      clients that are based out of this location. It is the Company’s intention to
      continue this expansion into the European market, specifically London, England.
      Over the past year the Company filed for a Canadian Scientific Research and
      Experimental Development grant from the Canadian Government based on the
      uniqueness of the product’s technical features. These grants are awarded to
      companies for the advancement of science or technology beyond the scope of
      current commercially available products. Due to the unique and proprietary
      technical advancements Phantom Fiber has developed in mobile transaction
      enablement it has received these grants.




8




**Results
      of operations**




In
      fiscal
      2007 the operating loss, before other income and expenses, decreased by
      $1,298,552 to $1,750,623 from $3,049,175 in fiscal 2006. After the net impact
      of
      other income and expenses the net loss for the fiscal year ended December 31,
      2007 was $3,659,849 ($0.21 per share) compared to a net loss of $2,904,936
      ($0.19 per share) for the same period in the preceding year an increase of
      $754,913.




**Revenue**




Total
      revenue increased by $186,014 from $309,271 for the year ended December 31,
      2006
      to $495,285 for the year ended December 31, 2007, an increase of 60%.
      Professional services revenue increased by $114,370 from $155,657 in fiscal
      2006
      to $270,027 in fiscal 2007 due to the addition of new, large customers.




User
      fees
      and royalties are based on number of users and are recognized monthly. User
      fees
      and royalties increased by $71,644 from $153,614 in 2006 to $225,258 in 2007
      due
      to steady increase in user numbers as new customers come online and generate
      additional revenues.




**Operating
      expenses**




Total
      operating expenses decreased $1,112,538 from $3,358,446 for the year ended
      December 31, 2006 to $2,245,908 for the year ended December 31, 2007, a decrease
      of 33%. Operating expenses are grouped into Research and Development, Sales
      and
      Marketing and General and Administrative. The change in each of these groupings
      is described below:




**Research
      and development**




The
      total
      research and development costs decreased by $160,730 to $919,952 in 2007 from
      $1,080,682 in the prior year. R&D salaries and benefits paid to develop the
      product and assist in implementation decreased from $1,315,024 in 2006 to
      $1,098,554 in 2007 a decrease of $216,470 (16%). The savings in salaries and
      benefits is offset by an decrease in research and development tax credits from
      $245,723 in 2006 to $198,329 in 2007 a decrease of $47,395. The Company
      decreased its staff numbers by 3 people in 2007 as a result of normal turnover.
      These vacancies are currently being filled in early 2008. Employees were granted
      options valued at $52,082 during the year compared to $81,155 in 2006, a
      decrease of $29,073. Other R&D expenses include software licenses, phone
      usage and other miscellaneous items. These costs increased from $11,381 in
      fiscal 2006 to $19,726 in fiscal 2007.




**Sales
      and marketing**




Total
      sales and marketing expenses decreased by $398,116 to $454,884 in the year
      to
      date of fiscal 2007 from $853,000 in the previous year. Sales and marketing
      salaries decreased by $34,618 from $274,439 in 2006 to $239,821 in 2007 due
      to
      the replacement of one staff during the year for a less expensive resource.
      Employees were granted options valued at $24,942 in fiscal 2007. The Company
      had
      four people in the sales and marketing department as of December 31, 2007 versus
      four in 2006. Spending on public relations, investor relations and advertising
      decreased in 2007 to $36,316 from $389,517 in 2006. Services previously provided
      by a firm in New York were cancelled primarily accounting for the decrease.
      The
      Company signed an agreement with a firm during fiscal 2007 to assist in public
      relations and investor relations. The firm received stock compensation with
      a
      fair value of $20,400 and $23,000 for services rendered. Consulting expenses
      increased by $19,391 to $44,184 in 2007 from $24,793 in 2006. The Company also
      recognized $17,776 in bad debt expenses for 2007 versus $44,601 in 2006.




**General
      and administrative expenses**




The
      Company’s general and administrative expenses decreased to $871,072 for the year
      ended December 31, 2007 from $1,424,764 for the prior year, a decrease of
      $553,692. Administrative salaries and benefits decreased from $695,587 in 2006
      to $392,513 in 2007 a decrease of $303,074, as a result of bonuses of $265,000
      in 2006 and none in 2007, employee options valued at $53,390 in 2006 versus
      $33,632 in 2007 and an unrealized exchange loss on salary accruals of $15,541.
      Accounting fees decreased $158,028 in 2007 as a result of a change in auditors
      and additional resources required to complete first and second quarters 2006
      which were not required in 2007. The occupancy costs increased by $8,577 from
      $105,739 in 2006 to $114,316 in 2007 due to increases in monthly rent. The
      Company incurred legal fees of $47,595 during 2007, a decrease of $107,335
      over
      2006. This decrease is due to minimal activity requiring legal work.




9




**Other
      income and expenses**




During
      2007 holders of senior convertible debt exercised the conversion feature
      resulting in interest expense in the amount of $218,107 being recognized. An
      additional $2,717,094 of interest on accretion of senior convertible debt was
      recognized in fiscal 2007. The Company recognized a net gain for change in
      value
      of $1,962,880 related to the derivative instruments associated with the
      convertible debt issued by the Company. The financing costs associated with
      the
      senior convertible debt have been deferred and are being amortized over 24
      months, the life of the instrument and resulted in amortization expense of
      $242,052 in fiscal 2007. The Company also secured short-term financing of
      $830,000 which resulted in warrants being issued and resulted in deferred
      financing costs of $301,547. Of the $301,547 of deferred financing costs
      incurred, $296,830 was amortized during 2007.




**Liquidity
      and Capital Resources**




The
      Company’s working capital changed from a negative working capital of $338,724 at
      December 31, 2006 to a negative working capital of $5,440,537 at December 31,
      2007 representing a change of $5,101,813. The deterioration was primarily the
      result of funds raised through short term borrowings of $1,135,820, other
      borrowings of $182,300, derivative instruments of $354,344 and senior
      convertible notes of $2,807,000. In 2006, the derivative instruments and senior
      convertible note were classed as long term liabilities. Accrued liabilities
      increased by $403,844 primarily as a result of interest on loans and interest
      on
      convertible debt. Unearned revenue increased by $115,066 due to new accounts
      net
      of costs. As of December 31, 2007, the Company had cash and cash equivalents
      of
      $44,642 compared with cash and cash equivalents of $29,864 at the end of the
      prior year.




For
      the
      year ended December 31, 2007, cash used in operating activities totaled
      $1,240,411, primarily as a result of operating losses. This amount compares
      to
      $2,584,574 used in operations in 2006. These losses were funded by an increase
      in financing activities of $1,303,016. The Company raised funds through short
      term borrowings of $1,135,820 and the security subscriptions received of
      $182,300. These funds raised were offset by capital lease payments of $15,104
      during the year. During 2007 the Company sold marketable securities for $52,260.
      During 2006 the Company raised funds in an issuance of senior convertible notes
      of $2,642,000, a net decrease in short term borrowings of $45,171 and the
      proceeds from stock options of $6,394. These funds raised were offset by
      financing costs of $275,280 and capital lease payments of $20,639 during the
      year. Also, during 2006 the Company purchased a short term investment for
      $516,293 which matured and the proceeds used to fund operations.




**Financial
      Condition**




Total
      assets decreased $274,346 from $790,097 as at December 31, 2006 to $515,751
      as
      at December 31, 2007:




·
            Cash
                increased by $14,778.·
            Accounts
                receivable net of allowance for doubtful accounts, increased by $74,358
                due to increased revenues. The allowance for doubtful accounts increased
                $573 in fiscal 2007. Uncollectible accounts were written off in the
                amount
                of $17,776.·
            Marketable
                securities decreased by $25,001 due to the sale of all
                holdings.·
            Investment
                tax credits receivable decreased by $90,800 as a result of previous
                years
                credits having been collected offset by estimated credits for the
                last
                half of 2007.·
            Prepaid
                expenses decreased $3,712.·
            Property
                and equipment decreased by $6,634 as a result of new computer equipment
                valued at $7,873, exchange rate changes accounting for $831 offset
                by
                depreciation of $15,338 for the period.·
            Deferred
                financing costs decreased by $237,335 as a result of warrants issued
                for
                short term financing valued at $301,547 offset by amortization of
                $538,882
                for the period.




10




Total
      liabilities increased $2,631,933 from $3,264,727 at December 31, 2006 to
      $5,896,660 as at December 31, 2007.




·
            An
                increase in trade accounts payable of $73,313 from December 31, 2006
                to
                December 31, 2007, principally due to accrued taxes and audit
                fees,·
            an
                increase in accrued liabilities due to related parties for services
                provided and interest on loans of $127,763,·
            an
                increase in accrued liabilities of $276,081 due to interest on convertible
                debt of $220,111, interest on loans of $43,366, increase in franchise
                taxes of $13,833, increase in public relations of $17,000, offset
                by a
                decrease in director fees of $32,999,·
            unearned
                revenue increased $115,066 due to new accounts,·
            an
                increase in short term borrowings of $1,135,820,·
            an
                increase of $182,300 in other borrowings,·
            a
                decrease in obligations under capital leases due to two new leases
                of
                $7,873 offset by payments during the period·
            a
                decrease of $1,962,880 attributable to the accounting for derivative
                instruments relating to convertible notes,·
            an
                increase in interest due on senior convertible debt borrowings of
                $2,691,701 net of conversions.




The
      consolidated financial statements of the Company are prepared in conformity
      with
      accounting principles generally accepted in the United States (“U.S. GAAP”),
      which require management to make estimates and assumptions that affect the
      reported amounts of assets and liabilities and disclosure of contingent assets
      and liabilities at the date of the financial statements and the reported amounts
      of revenues and expenses during the reporting period. Some of the significant
      estimates required to be made by management include the fair value of common
      stock and common stock equivalents issued for services or in settlement of
      obligations. Actual results could differ from those estimates.




**Subsequent
      Events**




In
      January 2008, the Company issued 330,000 unrestricted common shares to a senior
      convertible debt holder who exercised their right to convert to common shares
      at
      $0.50 per share.




In
      January 2008, the Company negotiated short term financing of $50,000. Interest
      of 10% per annum is payable upon expiry of the note or repayment date. The
      term
      of the loan is 180 days from receipt with interest of 15% should repayment
      not
      be made within this time frame.




On
      January 15, 2008, the Company sold (a) $973,583 principal amount of new senior
      convertible notes, and (b) warrants to purchase 2,165,674 shares of common
      stock, to 7 accredited investors. These convertible notes were paid by means
      of
      security subscriptions received amounting to $182,300, the settlement of short
      term loans payable of $780,000 and settlement of director dividends payable
      in
      the amount of $11,283. The senior convertible notes bear interest at 1% per
      annum payable semi-annually. The notes mature two years from the date of
      issuance and are convertible into shares of common stock at the investors’
option at $0.50 per share for one investor and $0.42 per share for the remaining
      investors, subject to adjustment. The warrants are exercisable until three
      years
      from the date of issuance. The warrants are exercisable at a purchase price
      of
      $0.50 per share. This transaction was exempt from registration requirement
      pursuant to Section 4(2) of the Securities Act and Rule 506 promulgated there
      under.




On
      January 31, 2008, the Registrant concluded the negotiations for the extension
      of
      its Senior Secured Note and on February 11, 2008, the final agreements were
      delivered to the Holder. The amendments are to its outstanding Senior Unsecured
      Note (the “Amended Note”) in the principal amount of $2,642,000 originally
      entered into on January 6, 2006. The Holder of the Amended Note, Victory Park
      Master Fund, Ltd., (the “Holder”) agreed to an extension of the due date until
      May 31, 2008. In exchange for waiving interest due and any technical defaults
      of
      the original Registration Rights Agreement and in exchange for the extension
      of
      the due date and the cancellation of the Class A Warrants to purchase up to
      2,642,000 $0.001 par value common stock of the Registrant for an exercise price
      of $1.50 per share, the Registrant agreed to issue 900,000 restricted common
      shares to the Holder. The agreements also provide for the early prepayment
      of
      the Amended Note at a discount under certain circumstances. The revised interest
      rate of the Amended Note is 12% annually and the amendment also provides for
      the
      Holder to be granted a security interest in all of the Registrant’s
      assets.




11




On
      February 11, 2008, certain employees exercised their option agreement to
      purchase 90,749 restricted common shares which had previously vested. The
      options were exercised at $0.228 per share.




On
      March
      25, 2008, the Company sold (a) $100,000 principal amount of senior convertible
      notes, and (b) warrants to purchase 238,095 shares of common stock, to an
      accredited investor. These
      convertible notes were utilized to pay $50,000 of short term borrowings existing
      as of December 31, 2007 and an additional $50,000 of short term borrowings
      received in January 2008. The senior convertible notes bear interest
      at 1% per annum payable semi-annually. The notes mature on January 15, 2010
      and
      are convertible into shares of common stock at the investors’ option at $0.42
      per share, subject to adjustment. The warrants are exercisable until three
      years
      from the date of issuance. The warrants are exercisable at a purchase price
      of
      $0.50 per share. This transaction was exempt from registration requirement
      pursuant to Section 4(2) of the Securities Act and Rule 506 promulgated there
      under. On March 25, 2008, the Company issued 238,095 restricted common shares
      to
      this investor who exercised his right to convert to common shares at $0.42
      per
      share.




**Off-Balance
      Sheet Arrangements**




The
      Company does not have any off balance sheet arrangements that are reasonably
      likely to have a current or future effect on our financial condition, revenues,
      results of operations, liquidity or capital expenditures.




**Critical
      Accounting Policies and Estimates**




The
      discussion and analysis of results of operations and financial condition are
      based upon the consolidated financial statements, which have been prepared
      in
      accordance with U.S. GAAP. The preparation of these consolidated financial
      statements requires management to make estimates and judgments that affect
      the
      reported amounts of assets, liabilities, revenues and expenses, and related
      disclosure of contingent assets and liabilities. Management evaluates the
      estimates on an on-going basis, including those related to bad debts,
      inventories, investments, customer accounts, intangible assets, income taxes,
      and contingencies and litigation. Management bases its estimates on historical
      experience and on various other assumptions that they believe to be reasonable
      under the circumstances, the results of which form the basis for making
      judgments about the carrying values of assets and liabilities that are not
      readily apparent from other sources. Actual results may differ from these
      estimates under different assumptions or conditions. Note 2 of the "Notes to
      Consolidated Financial Statements" of the Company’s annual audited Consolidated
      Financial Statements includes a summary of the significant accounting policies
      and methods used in the preparation of the consolidated financial statements.
      The following is a brief description of the more significant accounting policies
      and methods the Company uses.




**Investments**




The
      Company’s investment in marketable securities is classified as available for
      sale securities. Unrealized holding gains and losses are reported as a net
      amount in a separate component of shareholders’ equity until
      realized.




**Revenue
      recognition**




The
      Company recognizes software licensing revenues in accordance with all applicable
      accounting regulations, including the American Institute of Certified Public
      Accountants Statement of Position ("SOP") 97-2, "Software Revenue Recognition”,
      SOP 98-9, "Modification of SOP 97-2 with respect to Certain Transactions" and
      Staff Accounting Bulletin (“SAB”) 104.




Following
      the requirements of these accounting pronouncements, the Company recognizes
      license revenues when all of the following conditions are met:




·
            there
                is a signed license agreement with the
                customer;


·
            the
                software product or defined objective has been delivered to the
                customer;


·
            the
                amount of the fees to be paid by the customer is fixed or determinable;
                and


·
            collection
                of these fees is probable.


12




The
      Company generally negotiates formal license agreements with its customers.
      Each
      of the license agreements includes provisions for receipt of an up-front license
      fee and royalties. Generally, service providers pay these royalty fees either
      in
      the form of a one-time payment or as an on-going monthly fee. On-going royalties
      are recognized monthly based on the number of subscribers at month end. One-time
      royalties are recognized based on the number of new subscribers at the end
      of
      each period. Up-front fees for consulting services are recognized once the
      product is delivered to the customer. Up-front license fees are recognized
      in
      the period for which the payment was intended.




The
      Company may also negotiate license agreements that allow for the payment of
      the
      initial license fee to be made in future installments over a period of less
      than
      a year. Revenues recognized in advance of the installments being due are
      recorded as unbilled revenues in the balance sheet.




Maintenance
      and technical support revenues are recognized ratably over the applicable
      service period, which is usually one year. Revenues derived from professional
      services are recognized upon performance of the related services. Revenues
      derived from license agreements containing multiple deliverables, such as
      product licenses, maintenance and technical support and other services, are
      allocated among the various deliverables based on the fair value of each
      deliverable. Payments received from customers prior to the completion of
      services are recorded as unearned revenue.





**Recent
      Accounting Pronouncements Affecting The Company:**




FSP
      FAS 123(R)-5, Amendment of FASB Staff Position FAS 123(R)-1:




FSP
      FAS
      123(R)-5 was issued on October 10, 2006. The FSP provides that instruments
      that
      were originally issued as employee compensation and then modified, and that
      modification is made to the terms of the instrument solely to reflect an equity
      restructuring that occurs when the holders are no longer employees, no change
      in
      the recognition or the measurement (due to a change in classification) of those
      instruments will result if both of the following conditions are met: (a). There
      is no increase in fair value of the award (or the ratio of intrinsic value
      to
      the exercise price of the award is preserved, that is, the holder is made
      whole), or the antidilution provision is not added to the terms of the award
      in
      contemplation of an equity restructuring; and (b). All holders of the same
      class
      of equity instruments (for example, stock options) are treated in the same
      manner. The provisions in this FSP shall be applied in the first reporting
      period beginning after the date the FSP is posted to the FASB website. We will
      adopt this FSP from its effective date. We will evaluate whether the adoption
      will have any impact on our financial statements.




SFAS
      No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(SFAS No. 159)




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159 permits
      entities to choose to measure, on an item-by-item basis, specified financial
      instruments and certain other items at fair value. Unrealized gains and losses
      on items for which the fair value option has been elected are required to be
      reported in earnings at each reporting date. SFAS No. 159 is effective for
      fiscal years beginning after November 15, 2007, the provisions of which are
      required to be applied prospectively. The Company expects to adopt SFAS No.
      159
      in the first quarter of fiscal 2008.




SFAS
      No. 141 (revised 2007), “Business Combinations” (SFAS No 141 (revised
      2007))




In
      December 2007, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised
      2007), Business Combinations , which replaces SFAS No 141. The statement retains
      the purchase method of accounting for acquisitions, but requires a number of
      changes, including changes in the way assets and liabilities are recognized
      in
      the purchase accounting. It also changes the recognition of assets acquired
      and
      liabilities assumed arising from contingencies, requires the capitalization
      of
      in-process research and development at fair value, and requires the expensing
      of
      acquisition-related costs as incurred. SFAS No. 141R is effective
      for business combinations for which the acquisition date is on or after the
      beginning of the first annual reporting period beginning on or after December
      15, 2008.




13


SFAS
      No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS
      No 160)






In
      December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
      Consolidated Financial Statements, an amendment of ARB 51, which changes the
      accounting and reporting for minority interests. Minority interests will be
      recharacterized as noncontrolling interests and will be reported as a component
      of equity separate from the parent’s equity, and purchases or sales of equity
      interests that do not result in a change in control will be accounted for as
      equity transactions. In addition, net income attributable to the noncontrolling
      interest will be included in consolidated net income on the face of the income
      statement and, upon a loss of control, the interest sold, as well as any
      interest retained, will be recorded at fair value with any gain or loss
      recognized in earnings. SFAS No. 160 is effective for annual periods
      beginning after December 15, 2008. We are currently assessing the potential
      impact that adoption of SFAS No. 160 would have on our financial
      statements.




SFAS
      No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS
      No. 161)




In
      March
      2008, the Financial Accounting Standards Board (FASB) issued FASB Statement
      No.
      161, Disclosures about Derivative Instruments and Hedging Activities. The new
      standard is intended to improve financial reporting about derivative instruments
      and hedging activities by requiring enhanced disclosures to enable investors
      to
      better understand their effects on an entity’s financial position, financial
      performance, and cash flows. It is effective for financial statements issued
      for
      fiscal years and interim periods beginning after November 15, 2008, with early
      application encouraged. The company is currently evaluating the impact of
      adopting SFAS. No. 161 on its financial statements.




SFAS
      No. 157, “Fair Value Measurements” (SFAS No.157)




In
      September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
      which defines fair value, establishes a framework for measuring fair value
      in
      generally accepted accounting principles, and expands disclosures about fair
      value measurements. This statement does not require any new fair value
      measurements, but provides guidance on how to measure fair value by providing
      a
      fair value hierarchy used to classify the source of the information. SFAS
      No. 157 is effective for fiscal years beginning after November 15, 2007,
      and all interim periods within those fiscal years. In February 2008, the FASB
      released FASB Staff Position (FSP FAS 157-2 - Effective Date of FASB Statement
      No. 157) which delays the effective date of SFAS No. 157 for all
      nonfinancial assets and nonfinancial liabilities, except those that are
      recognized or disclosed at fair value in the financial statements on a recurring
      basis (at least annually), to fiscal years beginning after November 15, 2008
      and
      interim periods within those fiscal years. We are currently assessing the
      potential impact that adoption of this statement would have on our financial
      statements.




EITF
      Issue No. 07-3, “Accounting for Advance Payments for Goods and Services to be
      Used in Future Reaserach and Development (EITF 07-3)




In
      June 2007, the EITF reached consensus on EITF Issue No. 07-3,Accounting for
      Advance Payments for Goods and Services to Be Used in Future Research and
      Development Activities ("EITF 07-3"). EITF 07-3 states that
      non-refundable advance payments for future research and development activities
      should be capitalized until the goods have been delivered or the related
      services have been performed. EITF is effective for fiscal years beginning
      after
      December 15, 2007. Entities are to recognize the effects of EITF 07-3
      prospectively for new contracts entered into after the effective date. The
      adoption of EITF 07-3 is not expected to have a material impact on our
      financial statements.




EITF
      No. 07-1, “Accounting for Collaborative Arrangements (EITF No.
      07-1)




In
      December 2007, the EITF of the FASB reached a consensus on Issue No. 07-1 ,
      Accounting for Collaborative Arrangements ("EITF 07-1"). The EITF concluded
      on the definition of a collaborative arrangement and that revenues and costs
      incurred with third parties in connection with collaborative arrangements would
      be presented gross or net based on the criteria in EITF 99-19 and other
      accounting literature. Based on the nature of the arrangement, payments to
      or
      from collaborators would be evaluated and its terms, the nature of the entity's
      business, and whether those payments are within the scope of other accounting
      literature would be presented. Companies are also required to disclose the
      nature and purpose of collaborative arrangements along with the accounting
      policies and the classification and amounts of significant financial-statement
      amounts related to the arrangements. Activities in the arrangement conducted
      in
      a separate legal entity should be accounted for under other accounting
      literature; however required disclosure under EITF 07-1 applies to the
      entire collaborative agreement. EITF 07-1 is effective for annual periods
      beginning after December 15, 2007 and is to be applied retrospectively to
      all periods presented for all existing collaborative arrangements. We do not
      expect the adoption of EITF 07-1 to have a material impact on our financial
      statements.




14




**Item
      7. **Financial
      Statements.****





All
      financial information required by this Item is attached hereto at the end of
      this report beginning on page F-1 and is hereby incorporated by reference.




**Item
        8.** **Changes
        In and Disagreements With Accountants on Accounting and Financial
        Disclosure.**




None.




**Item
        8A(T).** **Controls
        and Procedures.**




As
      of the
      end of the period covered by this report, the Company conducted an evaluation,
      under the supervision and with the participation of the Company’s chief
      executive officer and principal financial officer of its disclosure controls
      and
      procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange
      Act). Based upon this evaluation, the Company’s chief executive officer and
      principal financial officer concluded that the disclosure controls and
      procedures are effective as of the end of the period covered by this report
      to
      ensure that information required to be disclosed by the Company in the reports
      that it files or submits under the Exchange Act is: (1) accumulated and
      communicated to management, including the Company’s chief executive officer and
      principal financial officer, as appropriate to allow timely decisions regarding
      required disclosure; and (2) recorded, processed, summarized and reported,
      within the time periods specified in the Commission's rules and forms. There
      was
      no change to the Company’s internal controls or in other factors that could
      affect these controls during the Company’s last fiscal quarter that has
      materially affected, or is reasonably likely to materially affect, the Company’s
      internal control over financial reporting.




*Management’s
      Annual Report on Internal Control over Financial Reporting*




Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting. Internal control over financial reporting
      is a
      process designed by, or under the supervision of, the chief executive officer
      and chief financial officer and effected by our board of directors, management
      and other personnel. To provide reasonable assurance regarding the reliability
      of financial reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting
      principles.




Our
      evaluation of internal control over financial reporting includes using the
      COSO
      framework, an integrated framework for the evaluation of internal controls
      issued by the Committee of Sponsoring Organizations of the Treadway Commission,
      to identify the risks and control objectives related to the evaluation of our
      control environment.




Based
      on
      our evaluation under the frameworks described above, our management has
      concluded that our internal control over financial reporting was effective
      as of
      December 31, 2007.




This
      annual report does not include an attestation report of the company’s registered
      public accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to attestation requirements by the company’s
      registered public accounting firm pursuant to temporary rules of the Securities
      and Exchange Commission that permit the company to provide only management’s
      report in this annual report.




Changes
      in Internal Control Over Financial Reporting




No
      change
      in the Company's internal control over financial reporting occurred during
      the
      quarter ended December 31, 2007, that materially affected, or is reasonably
      likely to materially affect, the Company's internal control over financial
      reporting.




**ITEM
      8B.**  **OTHER
      INFORMATION.**





None.




15


**PART
      III**




**ITEM
      9.**  **DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
      16(A)
      OF THE EXCHANGE ACT.**




The
      members of the Company’s board of directors and executive officers, together
      with their respective ages and certain biographical information are set forth
      below. There are no family relationships among any of the directors or executive
      officers.




**Name**
                
                **Age**
                
                **Position**Jeffrey
                    T. Halloran
                
                46
                
                Chief
                    Executive Officer, President, Principal Financial Officer, Principal
                    Accounting Officer and ChairmanHerbert
                    C. Sears
                
                39
                
                Chief
                    Technology OfficerDennis
                    Logan
                
                40
                
                DirectorShimon
                    Constante
                
                35
                
                DirectorKonstantine
                    (Gus) Lucas
                
                60
                
                DirectorStephen
                    Gesner
                
                52
                
                Director




Mr.
      Halloran became Chief Executive Officer, President and Chairman on January
      7,
      2002. Mr. Halloran assumed the positions of Principal Financial Officer and
      Principal Accounting Officer effective on January 1, 2005. From March 2001
      to
      November 2001, he was the Chief Executive Officer of Sona Innovations Inc.,
      a
      wireless software company. From March 1989 to February 2001, Mr. Halloran was
      the Chief Executive Officer and President of Relational Solutions Inc., a
      computer systems consulting firm. From August 1987 to March 1989, he was a
      Consulting Manager for Oracle Corporation providing database consulting
      services. Mr. Halloran graduated from St. Clair College in 1982 with a degree
      in
      business administration. He currently serves as a Director for the Council
      on
      Drug Abuse (“CODA”) in Toronto.




Mr.
      Sears
      has been Chief Technology Officer since January 2002. From November 2000 to
      December 2001, he was Vice President-Technology of Sona Innovations Inc.,
      engaged in software development. From May 1996 to October 2000, Mr. Sears was
      the Director of Technology of ANGOSS Software Corp. and was engaged in software
      development. From June 1992 to May 1996, he was a Senior Developer and
      programmer employed by CS Computing Services Inc. Mr. Sears graduated from
      DeVry
      Institute of Technology in 1989 with a degree in computer science.




Mr.
        Logan
        became a director in September 2007. He currently serves as a Managing
        Director of Investment Banking for Desjardins Securities. Prior to joining
        Desjardins Securities, from May 2005 until June 2007, Mr. Logan
        was a Director in the Investment Banking Group at Westwind Partners where
        he
        focused on both corporate finance and merger & acquisition activity in the
        Real Estate, Technology and Special Situations sectors. Before that Mr. Logan
        has also held Investment Banking positions with LOM Ltd from August 2003
        to
        January 2005, CIBC World Markets from April 2000 to May 2003 and TD
        Securities Inc. from May 1998 to April 2000 and began his career
        in financial services in September 1994 as a staff accountant with
        Ernst & Young LLP. Mr. Logan holds both an Honours BA Philosophy &
Economics (1991) and an MBA (1994) from the University of Toronto and is
        a
        Chartered Accountant.




Mr.
      Constante became a director in November 2006. He is the Chief Executive Officer
      of mPortico, a private mobile distribution and marketing services provider,
      since the company was founded in December 2005. Prior to founding mPortico,
      from
      March 2003 until August 2005, Mr. Constante was the Head of Mobile Business
      Development at 888.com, an online entertainment company. Prior to that, from
      July 2000 until January 2002, Mr. Constante was the Head or Technology and
      Business Research at Aduva, a privately held technology company. Mr. Constante
      received a B.A. in Psychology in 1999 and an Executive MBA from Kellogg,
      Northwestern University in 2004. Mr. Constante also currently sits on the board
      of directors of Cidway Security, a privately held company.




Mr.
      Lucas
      became a director on February 13, 2006. Mr. Lucas currently serves as Executive
      Vice President, Warner Bros. Domestic Cable Distribution. Prior to his Warner
      Bros. employment, from September 1998 until April 2000, Mr. Lucas was a
      consultant to the media industry including cable networks and MGM Studios.
      Prior
      to that, from May 1995 to August 1998, Mr. Lucas was President of Programming
      for the Family Channel. Before joining the Family Channel, from August 1986
      to
      September 1993, Mr. Lucas was Executive Vice-President, Viacom Entertainment
      Group, and President, West Coast Operations and Viacom Productions. Prior to
      that, from March 1970 until July 1986, Mr. Lucas held several positions at
      ABC
      Entertainment, culminating in his position as Vice-President and assistant
      to
      the President of ABC Entertainment.




16




Mr.
      Gesner became a director on February 13, 2006. Mr. Gesner currently serves
      as
      the Executive Vice President and CIO of Resolve Corporation. Prior to such
      service, he was the Chief Information Officer of Meridian Credit Union from
      April 2005 to December 2007 and from May 2004 to March 2005, Mr. Gesner was
      the
      Vice President of Financial Services Marketing for TELUS Communications. During
      the period May 2003 to December 2003, he served as the CTO for Cap Gemini Ernst
      and Young Canada. Before that Mr. Gesner worked for 14 years with TD Bank
      Financial Group, beginning in January 1989 as a consultant in the Cash
      Management Group and moving through various senior roles culminating in his
      position as Senior Vice President and Chief Technology Officer from March 2000
      through November 2002. Mr. Gesner began his career with Ford Motor Company
      of
      Canada in September 1979 and held several positions in Finance, Treasury,
      Production Planning, and Industrial Relations through December 1988. Mr. Gesner
      holds an Honours BSc from York University (1977) and an M.B.A from the Schulich
      School of Business (1979). He is currently on the Board of Directors for Smart
      Systems for Health Agency and PCAS. Mr. Gesner is also on the Advisory Boards
      of
      Univeris and Exceptionalities.




**Board
      of Directors**




At
      each
      annual meeting of stockholders, all of the Company’s directors are elected to
      serve from the time of election and qualification until the next annual meeting
      of stockholders following election. The exact number of directors is to be
      determined from time to time by resolution of the Board of Directors.




Each
      officer is elected by, and serves at the discretion of the Board of Directors.
      Each of the Company’s officers devotes his full time to our affairs.




**Audit
      Committee**




On
      March
      24, 2006 the Board of Directors established an Audit Committee to oversee and
      monitor the Company’s accounting and reporting processes and the audits of the
      Company’s financial statements. The Audit Committee is presently composed of two
      persons, including Mr. Stephen Gesner and Mr. Dennis Logan. Mr. Logan serves
      as
      Chairman of the Audit Committee. As of the date this report was filed with
      the
      SEC, the Board of Directors has not yet adopted an Audit Committee Charter
      and
      the Audit Committee has held four meetings thoughout the year to review each
      financial filing. The Company does have an audit committee financial expert
      as
      that term is defined in Item 401 of Regulation S-B. Mr. Dennis Logan will serve
      as the audit committee financial expert.




**Compensation
      Committee**




On
      March
      24, 2006 the Board of Directors established a Compensation Committee to
      determine and recommend to the Board the compensation to be paid the Company’s
      executive officers, to review the amount of salary and bonus for each of the
      Company’s other officers and employees and to determine and recommend to the
      Board the amount of stock option grants to be issued to the Company’s officers
      and directors under the Company’s 2000 Stock Option Plan. The Compensation
      Committee is presently composed of 2 persons, including Konstantine (Gus) Lucas
      and Shimon Constante. Konstantine (Gus) Lucas serves as Chairman of the
      Compensation Committee. As of the date this report was filed with the SEC,
      the
      Board of Directors has not yet adopted a Compensation Committee Charter and
      the
      Compensation Committee has not held any meetings or taken any
      action.




**Code
      of Ethics**




The
      Company has adopted a Code of Ethics and Business Conduct that applies to
      executive officers, directors and employees, and is filed as Exhibit 14.1 to
      this Form 10-KSB. Upon request, the Company will provide to any person, without
      charge, a copy of its Code of Ethics. Any such request should be made to Attn:
      Secretary, Phantom Fiber Corporation, 144 Front Street, Suite 580, Toronto,
      Ontario, Canada M5J 2L7. A copy of the Code of Ethics is available to investors
      and can be found on the Corporate Website at: www.phantomfiber.com .




**Section
      16(a) Beneficial Ownership Compliance**




Section
      16(a) of the Securities Exchange Act of 1934 requires directors and executive
      officers and persons who beneficially own more than ten percent of a registered
      class of the Company’s equity securities to file with the SEC initial reports of
      ownership and reports of change in ownership of common stock and other equity
      securities. Officers, directors and greater than ten percent stockholders are
      required by SEC regulations to furnish the Company with copies of all Section
      16(a) forms they file. Based solely upon a review of Forms 3 and 4 and
      amendments thereto furnished to the Company under Rule 16a-3(e) during the
      fiscal year ended December 31, 2007, and Forms 5 and amendments thereto
      furnished to the Company with respect to the fiscal year ended December 31,
      2007, the Company believes that during the year ended December 31, 2007, its
      executive officers, directors and all persons who own more than ten percent
      of a
      registered class of the Company’s equity securities complied with all Section
      16(a) filing requirements, except as follows: It
      has
      been determined that a number of instances of late or missing Form 3 and/or
      Form
      4 filings have occurred. The Company, in conjunction with its legal counsel
      will
      be addressing these issues with the persons in question and will ensure all
      necessary filings have been made in time for filing its next Form 10Q.




17




**ITEM
        10.** **EXECUTIVE
        COMPENSATION.**




The
      following table sets forth information concerning the annual and long-term
      compensation earned by or paid to the Chief Executive Officer and to the other
      named executive officers who served as executive officers as at and/or during
      the fiscal year ended December 31, 2007, for services as executive officers
      for
      the last three fiscal years.




**SUMMARY
      COMPENSATION TABLE**




**Annual
                Compensation**
            
            **Long-Term
                Compensation****Awards**
            
            **Payouts****Name and**
              **Principal Position**
            
            
            **Year**
            
            
            **Salary ($**)****
            
            
            **Bonus ($**)****
            
            
            **Other**
              **Annual**
              **Compen-**
              **sation ($****)******
            
            
            **RestrictedStockAward(s)(**$)****
            
            
            **SecuritiesUnderlyingOptions/SARs (#**)****
            
            
            **LTIP**
              **Payouts($**)****
            
            
            **All**
              **Other**
              **Compen-**
              **sation ($**)****Jeffrey T. Halloran,
            
            
            2007
            
            $
            250,000
            
            
            -0-
            
            $
            9,200
            (1)
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Chief
                Executive
            
            
            2006
            
            $
            250,000
            
            
            -0-
            
            $
            6,000
            (1)
            
            -0-
            
            
            300,000
            (2)
            
            -0-
            
            
            -0-Officer,
                President,
            
            
            2005
            
            $
            250,000
            
            
            -0-
            
            $
            6,000
            (1)
            $
            270,000
            (3)
            
            250,000
            (4)
            
            -0-
            
            
            -0-and
                PrincipalFinancial
                OfficerHerb
                Sears,
            
            
            2007
            
            $
            132,315
            
            
            -0-
            
            $
            5,293
            (5)
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Chief
                Technology
            
            
            2006
            
            $
            132,315
            
            
            -0-
            
            $
            5,293
            (5)
            
            -0-
            
            
            100,000
            (6)
            
            -0-
            
            
            -0-Officer
            
            
            2005
            
            $
            132,195
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Konstantine
                Lucas,
            
            
            2007
            
            
            -0-
            
            
            -0-
            
            $
            6,000
            (7)
            
            -0-
            
            
            80,905
            (8)
            
            -0-
            
            
            -0-Director
            
            
            2006
            
            
            -0-
            
            
            -0-
            
            $
            5,283
            (7)
            
            -0-
            
            
            52,817
            (8)
            
            -0-
            
            
            -0-2005
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Stephen
                Gesner,
            
            
            2007
            
            
            -0-
            
            
            -0-
            
            $
            6,000
            (7)
            
            -0-
            
            
            80,905
            (8)
            
            -0-
            
            
            -0-Director
            
            
            2006
            
            
            -0-
            
            
            -0-
            
            $
            5,283
            (7)
            
            -0-
            
            
            52,817
            (8)
            
            -0-
            
            
            -0-2005
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Dennis
                Logan
            
            
            2007
            
            
            -0-
            
            
            -0-
            
            $
            1,761
            (7)
            
            -0-
            
            
            53,237
            (8)
            
            -0-
            
            
            -0-Director
            
            
            2006
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-2005
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Shimon
                Constante,
            
            
            2007
            
            
            -0-
            
            
            -0-
            
            $
            6,000
            (7)
            
            -0-
            
            
            80,905
            (8)
            
            -0-
            
            
            -0-Director
            
            
            2006
            
            
            -0-
            
            
            -0-
            
            $
            913
            (7)
            
            -0-
            
            
            59,340
            (8
                )
            
            -0-
            
            
            -0-2005
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Chris
                Carmichael,
            
            
            2007
            
            
            -0-
            
            
            -0-
            
            $
            4,240
            (7)
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Former
                Director
            
            
            2006
            
            
            -0-
            
            
            -0-
            
            $
            3,049
            (7)
            
            -0-
            
            
            44,920
            (8)
            
            -0-
            
            
            -0-2005
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Gordon
                Fowler
            
            
            2007
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Former
                Director
            
            
            2006
            
            
            -0-
            
            
            -0-
            
            $
            6,000
            (7)
            
            -0-
            
            
            119,410
            (9)
            
            -0-
            
            
            -0-2005
            
            
            -0-
            
            
            -0-
            
            $
            40,000
            (10)
            
            20,000
            (11)
            
            75,000
            (12)
            
            -0-
            
            
            -0-Graham
                Simmonds
            
            
            2007
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Former
                Director
            
            
            2006
            
            
            -0-
            
            
            -0-
            
            $
            6,000
            (7)
            
            -0-
            
            
            119,410
            (9)
            
            -0-
            
            
            -0-2005
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-




18


(1)
            Pertains
                to a car allowance and office expense combining for a total of $1,000
                per
                month payable to Mr. Halloran.




(2)
            Reflects
                options granted to Mr. Halloran as a bonus entitling Mr. Halloran
                to
                purchase 300,000 restricted shares of common stock (after giving
                effect to
                a one-for-20 reverse stock split) at a price of $0.51 per share (after
                giving effect to a one-for-20 reverse stock
                split).




(3)
            Pertains
                to 500,000 restricted shares of common stock (after giving effect
                to a
                one-for-20 reverse stock split) issued to Mr. Halloran as a bonus
                earned
                pursuant to the terms of an employment agreement dated February 4,
                2004 at
                an estimated value of $0.54 per share (after giving effect to a one-for-20
                reverse stock split).




(4)
            Reflects
                warrants granted to Mr. Halloran as a bonus pursuant to the terms
                of an
                employment agreement dated February 4, 2004 and included as a de-facto
                options grant, entitling Mr. Halloran to purchase 250,000 restricted
                shares of common stock (after giving effect to a one-for-20 reverse
                stock
                split) at a price of $4.00 per share (after giving effect to a one-for-20
                reverse stock split).




(5)
            Pertains
                to a car allowance of $441 per month payable to Mr.
                Sears.




(6)
            Reflects
                options granted to Mr. Sears as a bonus entitling Mr. Sears to purchase
                100,000 restricted shares of common stock (after giving effect to
                a
                one-for-20 reverse stock split) at a price of $0.51 per share (after
                giving effect to a one-for-20 reverse stock
                split).




(7)
            Pertains
                to director fees earned during the
                year.




(8)
            As
                part of their compensation, current directors were granted options
                to
                purchase restricted common stock for services rendered at a price
                of $0.50
                per share. The number of options equated to $19,000 pro rated for
                the
                period of the year in which they were directors.




(9)
            Former
                directors were granted options to purchase restricted common stock
                at a
                price of $0.53 for their services from July 2004 to December
                2005.




(10)
            Pertains
                to cash amounts payable to Mr. Fowler for consulting services rendered
                during the period January 1, 2005 to April 30, 2005.




(11)
            Pertains
                to 25,000 restricted shares of common stock (after giving effect
                to a
                one-for-20 reverse stock split) to be issued to Mr. Fowler for consulting
                services rendered during the period November 1, 2004 to December
                31, 2004
                at an estimated value of $0.80 per share (after giving effect to
                a
                one-for-20 reverse stock split).




(12)
            Represents
                stock options granted to Mr. Fowler for consulting services during
                the
                fiscal year entitling Mr. Fowler to purchase: (a) 37,500 shares of
                common
                stock (after giving effect to a one-for-20 reverse stock split) at
                a price
                of $0.99 per share (after giving effect to a one-for-20 reverse stock
                split); and (b) 37,500 shares of common stock (after giving effect
                to a
                one-for-20 reverse stock split) at a price of $1.08 per share (after
                giving effect to a one-for-20 reverse stock
                split).




19


**OPTIONS
      GRANT TABLE**





The
      following table sets forth information with respect to the named executive
      officers concerning the grant of stock options during the fiscal year ended
      December 31, 2007. The Company did not have during such fiscal year any plans
      providing for the grant of stock appreciation rights (“SARs”).





**Option/SAR Grants in Last Fiscal Year****Individual Grants**
            
            **PotentialRealizable Valueat AssumedAnnual Rates ofStock PriceAppreciation forOption Term**
            
            **Alternativeto (f) and (g):Grant Date****Value****(a)**
              **Name**
            
            **(b)**
              **Number of SecuritiesUnderlyingOptions/ SARsGranted (#)**
            
            **(c)**
              **% of TotalOptions/ SARsGranted toEmployees inFiscal Year**
            
            **(d)**
              **Exerciseor BasePrice($/Sh)**
            
            **(e)**
              **Expiration Date**
            
            **(f)**
              **5% ($)**
            
            **(g)**
              **10% ($)**
            
            **(h)**
              **Grant Date**
              **Present**
              **Value ($) (1)**Konstantine
                Lucas
            
            
            80,905
            (2)
            
            21.5
            %
            $
            0.50
            
            
            April
                9, 2011
            
            
            —
            
            
            —
            
            $
            19,000Stephen
                Gesner
            
            
            80,905
            (2)
            
            21.5
            %
            $
            0.50
            
            
            April
                9, 2011
            
            
            —
            
            
            —
            
            $
            19,000Chris
                Carmichael
            
            
            80,905
            (2)
            
            21.5
            %
            $
            0.50
            
            
            April
                9, 2011
            
            
            —
            
            
            —
            
            $
            19,000Shimon
                Constante
            
            
            80,905
            (2)
            
            21.5
            %
            $
            0.50
            
            
            April
                9, 2011
            
            
            —
            
            
            —
            
            $
            19,000Dennis
                Logan
            
            
            53,237
            (2)
            
            14.0
            %
            $
            0.50
            
            
            September 14, 2011
            
            
            —
            
            
            —
            
            $
            19,000




(1)
            The
                value shown was calculated utilizing the Black-Scholes option pricing
                model and is presented solely for the purpose of comparative disclosure
                in
                accordance with certain regulations of the Securities and Exchange
                Commission. This model is a mathematical formula used to value traded
                stock price volatility. The actual value that an executive officer
                may
                realize, if any, is dependent on the amount by which the stock price
                at
                the time of exercise exceeds the exercise price. There is no assurance
                that the value realized by an executive officer will be at or near
                the
                value estimated by the Black-Scholes model. These values should not
                be
                used to predict stock value.




(2)
            Represents
                options granted to the current directors to purchase restricted shares
                of
                common stock for their services.




20




**Aggregate
      Option Exercises and Fiscal Year-End Option Values**





The
      following table sets forth information with respect to the named executive
      officers concerning the year-end value of “in the money” options and the value
      of unexercised options as of December 31, 2007. No options were exercised by
      the
      named executive officers during the fiscal year ended December 31,
      2007.


**Number of Securities****Underlying Unexercised****Options at****December 31, 2006 (#)(1)**
              
              **Value of Unexercised****In-the-Money Options****at December 31, 2006 ($)(2)****(Exercisable/Unexercisable)**
              
              **(Exercisable/Unexercisable)**Jeffrey
                  T. Halloran
              
              
              206,250/0
              
              
              $ 
                    31,350/$0Herb
                  Sears
              
              
              118,250/0
              
              
              $ 
                    17,974/$0Gordon
                  Fowler
              
              
              19,250/0
              
              
              $ 
                     2,926/$0




(1)
            Share
                numbers give effect to a one-for-20 reverse stock split and exclude
                (a) warrants granted to Mr. Halloran and expiring December 15, 2010
                which entitle him to purchase 250,000 restricted shares of common
                stock at
                $4.00 per share, (b) options granted to Mr. Halloran and expiring
                July 15, 2011, July 15, 2012, July 15, 2013 and July 15, 2014 entitling
                him to purchase 75,000 restricted shares of common stock at $0.51
                per
                share in each of the years, and (c) options granted to Mr. Sears
                and
                expiring July 15, 2011, July 15, 2012, July 15, 2013 and July 15,
                2014
                entitling him to purchase 25,000 restricted shares of common stock
                at
                $0.51 per share in each of the
                years.




(2)
            Using
                a stock price of $0.38 (after giving effect to a one-for-20 reverse
                stock
                split) at December 31, 2007. This number is calculated by: (a) subtracting
                the option exercise price from the December 30, 2007 closing market
                price
                ($0.38 per share, as reported on the OTC Bulletin Board) to calculate
                the
                “average value per option”; and (b) multiplying the average value per
                option by the number of exercisable and unexercisable “in the money”
                options. The amounts in this column may not represent amounts that
                will
                actually be realized by the named executive
                officer.




**Compensation
      of Directors**





On
      March
      24, 2006, the Company’s Board of Directors approved a plan to compensate each
      director with cash and stock options valued at $25,000 annually. The cash
      component will equal $6,000 per year with the $19,000 balance being the fair
      value of stock options valued using the Black Scholes pricing model. As a result
      the Board of Directors granted the following stock options to non-management
      directors as compensation, as applicable, for 2007: (1) the Board granted
      Konstantine (Gus) Lucas options to purchase 80,905 shares of common stock with
      an exercise price of $0.50 per share; (2) the Board granted Stephen Gesner
      options to purchase 80,905 shares of common stock with an exercise price of
      $0.50 per share; (3) the Board granted Chris Carmichael options to purchase
      80,905 shares of common stock with and exercise price of $0.50 per share; (4)
      the Board granted Shimon Constante options to purchase 80,905 shares of common
      stock with an exercise price of $0.50 per share; and (5) the Board granted
      Dennis Logan options to purchase 53,237 shares of common stock with an exercise
      price of $0.50 per share.





**Employment
      Agreements**





Under
      an
      employment agreement dated February 4, 2004, Jeff Halloran was engaged as
      President and Chief Executive Officer at an annual base salary of $250,000
      per
      annum, plus other benefits including a monthly car allowance of $500 and a
      monthly office expense allowance of $500. Should the company choose to terminate
      the employment agreement, Mr. Halloran is entitled to receive two times his
      base
      salary. All outstanding options are to immediately vest and all extended health
      care premiums will remain in full effect for a one-year period. Mr. Halloran
      is
      required to enter into a non-compete agreement with the Company.




21


**Item
          11.** **Security
          Ownership of Certain Beneficial Owners and Management and Related Stockholder
          Matters.**





**Security
      Ownership of Certain Beneficial Owners and Management**





The
      following table sets forth information regarding the beneficial ownership of
      the
      Company’s Common Stock as of March 31, 2008. The information in this table
      provides the ownership information for: each person known to be the beneficial
      owner of more than 5% of the Company’s Common Stock; each of the Company’s
      directors; each of the Company’s executive officers; and the Company’s executive
      officers and directors as a group.


Name and Address
                of Beneficial Owner
              
              Number of Shares of CommonStock
                Beneficially Owned (1)
              
              Percentage ofOutstanding Shares ofCommon Stock (1)Jeffrey
                  T. Halloran
              
              
              5,612,050
              (2)
              
              29.0
              %c/o
                  Phantom Fiber Corporation144
                  Front Street WestToronto,
                  Ontario M5J 2L7Lorraine
                  Halloran
              
              
              825,000
              
              
              4.4
              %c/o
                  Phantom Fiber Corporation144
                  Front Street WestToronto,
                  Ontario M5J 2L7Herbert
                  C. Sears
              
              
              118,250
              (3)
              
              *45
                  Roberson DriveAjax,Ontario,
                  Canada L1T 4K1Shimon
                  Constante
              
              
              140,245
              (4)
              
              *10
                  Kshani #39Tel-Aviv
                  69499, IsraelKonstantine
                  (Gus) Lucas
              
              
              4,039,642
              (5)
              
              19.3
              %17428
                  Oak Creek CourtEncino,
                  CA 91316Stephen
                  Gesner
              
              
              339,972
              (6)
              
              1.8
              %395
                  March CrescentOakville,
                  Ontario, Canada L6H 5X7Howard
                  Shapiro
              
              
              3,978,573
              (7)
              
              18.8
              %199
                  Logtown RoadPort
                  Jervis, NY 12771Ron
                  Sunderland
              
              
              1,125,334
              (8)
              
              5.6
              %3728
                  Regal Vista DriveSherman
                  Oaks, CA 91403Victory
                  Park Master Fund Ltd.
              
              
              3,542,000
              (9)
              
              16.4
              %All
                  Directors and Executive Officers as a Group (5 persons)
              
              
              10,250,159
              
              
              37.3
              %


*
      Less
      than 1%




(1)
              Applicable
                  percentage ownership is based on 17,959,684 shares of Common Stock
                  (after
                  giving effect to a one-for-20 reverse stock split) outstanding
                  as of March
                  31, 2008, together with securities exercisable or convertible into
                  shares
                  of Common Stock within 60 days of March 31, 2008 for each stockholder.
                  Beneficial ownership is determined in accordance with the rules
                  of the
                  Securities and Exchange Commission and generally includes voting
                  or
                  investment power with respect to securities. Shares of Common Stock
                  that
                  are currently exercisable or exercisable within 60 days of March
                  31, 2008
                  are deemed to be beneficially owned by the person holding such
                  securities
                  for the purpose of computing the percentage of ownership of such
                  person,
                  but are not treated as outstanding for the purpose of computing
                  the
                  percentage ownership of any other
                  person.




22


(2)
            Includes:
                4,224,550 shares held by the Halloran Family Trust; 1,000,000 restricted
                shares of Common Stock held by Mr. Halloran; warrants to purchase
                250,000
                shares of Common Stock at $4.00 per share issued by the Company on
                December 15, 2005; and stock options to purchase 137,500 shares of
                Common
                Stock, comprised of 110,000 options owned by Mr. Halloran and 27,500
                options owned by Bernadette Halloran, with an exercise price of $0.228
                per
                share. Quantities and prices in this footnote are adjusted to give
                effect
                to a one-for-20 reverse stock split.




(3)
            Represents
                a stock option to purchase 118,250 shares of Common Stock of the
                Company
                with an exercise price of $0.228 per share. Quantities and prices
                in this
                footnote are adjusted to give effect to a one-for-20 reverse stock
                split.




(4)
            Represents
                stock options to purchase 140,245 shares of Common Stock of the Company
                with an exercise price of $0.50 per share. Quantities and prices
                in this
                footnote are adjusted to give effect to a one-for-20 reverse stock
                split.




(5)
            Represents
                stock options to purchase 133,722 shares of Common Stock of the Company
                with an exercise price of $0.50 per share and 3,905,920 shares held
                or to
                be held by Konstantine J. Lucas and/or Konstantine J. Lucas and Beth
                Anne
                Lucas Trust and/or immediate family of which 250,000 shares of Common
                Stock is issuable upon exercise of warrants obtained April 26, 2005
                with
                an exercise price of $2.00 per share, 550,000 shares of Common Stock
                issued to Mr. Lucas as a result of conversion of outstanding senior
                convertible notes issued in a financing which closed on January 9,
                2006,
                550,000 shares are issuable upon exercise of warrants issued in connection
                with such financing (275,000 with an exercise price of $1.50 per
                share and
                275,000 with an exercise price of $0.56 per share), 514,960 shares
                are
                issuable upon conversion of outstanding senior convertible notes
                issued in
                a financing which closed on January 15, 2008 with an exercise price
                of
                $0.42 per share and 514,960 shares are issuable upon exercise of
                warrants
                issued in connection with the same financing with an exercise price
                of
                $0.50 per share. Quantities and prices in this footnote are adjusted
                to
                give effect to a one-for-20 reverse stock
                split.




(6)
            Represents
                206,250 shares of Common Stock held by Mr. Gesner and stock options
                to
                purchase 133,722 shares of Common Stock of the Company with an exercise
                price of $0.50 per share. Quantities and prices in this footnote
                are
                adjusted to give effect to a one-for-20 reverse stock
                split.




(7)
            Represents
                1,810,478 shares of Common Stock held by Mr. Shapiro, warrants to
                purchase
                330,000 shares of Common Stock issued in a financing which closed
                on
                January 9, 2006 (165,000 with an exercise price of $1.50 per share
                and
                165,000 with an exercise price of $0.56 per share), 800,000 shares
                of
                Common Stock issuable upon conversion of senior convertible notes
                issued
                in a financing which closed on January 15, 2008 at an exercise price
                of
                $0.50 per share, 800,000 shares of Common Stock issuable upon exercise
                of
                warrants issued in connection with the January 15, 2008 financing
                with an
                exercise price of $0.50 per share and 238,095 shares of Common Stock
                issuable upon exercise of warrants issued in connection with the
                March 25,
                2008 financing with an exercise price of $0.50 per share. Quantities
                and
                prices in this footnote are adjusted to give effect to a one-for-20
                reverse stock split.




(8)
            Represents
                121,000 shares of Common Stock held by Mr. Sunderland, warrants to
                purchase 121,000 shares of Common Stock issued in a financing which
                closed
                on January 9, 2006 (60,500 with an exercise price of $1.50 per share
                and
                60,500 with an exercise price of $0.56 per share), 416,667 shares
                of
                Common Stock issuable upon conversion of senior convertible notes
                issued
                in a financing which closed on January 15, 2008 with an exercise
                price of
                $0.42 per share and 416,667 shares of Common Stock issuable upon
                exercise
                of warrants issued in connection with the January 15, 2008 financing
                with
                an exercise price of $0.50 per share. Quantities and prices in this
                footnote are adjusted to give effect to a one-for-20 reverse stock
                split.




(9)
            Represents
                900,000 shares of Common Stock held by Victory Park Master Fund Ltd.
                And
                warrants to purchase 2,642,000 shares of Common Stock issued in a
                financing which closed on January 6, 2006. The warrants have an exercise
                price of $0.56 per share.




23




**Securities
      Authorized for Issuance Under Equity Compensation Plans**




The
      following table shows information with respect to each equity compensation
      plan
      under which common stock is authorized for issuance as of the fiscal year ended
      December 31, 2007. All common stock share amounts and exercise prices in this
      section have been adjusted to reflect a one-for-20 reverse split given effect
      by
      the OTC Bulletin Board on May 5, 2005.




**EQUITY
      COMPENSATION PLAN INFORMATION**


**Plan
                  category**
              
              **Number of securities**
                **to be issued upon**
                **exercise of**
                **outstanding options,**
                **warrants and rights**
              
              **Weighted average**
                **exercise price of**
                **outstanding options,**
                **warrants and rights**
              
              **Number of securities**
                **remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)****(a)**
              
              **(b)**
              
              **(c)****Equity
                  compensation plans approved by security holders**
              
              
              2,210,603
              
              $
              0.87
              
              
              39,397**Equity
                  compensation plans not approved by security
                  holders**
              
              
              -0-
              
              
              -0-
              
              
              -0-**Total**
              
              
              2,210,603
              
              $
              0.87
              
              
              39,397




On
      January 5, 2000, our Board of Directors adopted the Company’s 2000 Stock Option
      Plan which terminates on January 5, 2010. At a Special Meeting of Stockholders
      on February 29, 2000, the Plan was approved by the stockholders. On November
      30,
      2005, the Board of Directors approved an amendment to the 2000 Stock Option
      Plan
      to increase the number of shares of common stock subject to the plan after
      effectiveness of a one-for-20 reverse stock split from 1,000,000 shares to
      2,000,000 shares. On December 12, 2005, the Company’s shareholders approved the
      increase by unanimous written consent. As of December 31, 2005, after giving
      effect to the one-for-20 reverse stock split, there were 567,500 options
      outstanding under the 2000 Stock Option Plan and 250,000 warrants issuable
      to
      Jeff Halloran as a bonus under an employment agreement dated February 4, 2004
      and entitling him to acquire 250,000 restricted shares of common stock at a
      price of $4.00 per share. The 2000 Stock Option Plan is intended to help the
      Company and its subsidiaries attract and retain employees (including officers),
      directors, consultants and independent contractors and to furnish additional
      incentives to such persons to enhance the value of its business over the long
      term by encouraging them to acquire a proprietary interest in the Company.
      After
      March 24, 2006, the 2000 Stock Option Plan is administered by the Company’s
      Compensation Committee. The 2000 Stock Option Plan was previously administered
      by the Board of Directors.




**Item
        12.** **Certain
        Relationships and Related Transactions and Director
        Independence.**




The
      Company’s management believes the terms of each of the below transactions are at
      least as favorable as could be obtained from unrelated third
      parties.




**Loans
      From Related Parties**




Two
      loans
      were received from a related party amounting to $305,820 as at December 31,
      2007
      to fund our operations. These loans are reported as short term borrowings.
      The
      first loan, for $101,940 is unsecured, bearing interest at 21.5% and is
      repayable upon demand. The second loan, for $203,880 is secured, repayable
      3
      months from drawdown date and bears interest at 2.5% per month.




**Phantom
      Fiber Acquisition**




Pursuant
      to the terms of the July 7, 2004 share exchange agreement with Phantom Fiber
      Corp., our wholly owned subsidiary, the holders of an aggregate of CAD$1,200,000
      (approximately US$919,750) principal amount of our convertible debentures
      received an aggregate of 1,500,000 shares of our common stock and warrants
      (after adjustment for a one-for-20 reverse stock split) exercisable until the
      second anniversary of the closing to purchase 750,000 shares of common stock
      (after adjustment for a one-for-20 reverse stock split) at an exercise price
      of
      $1.68 per share (after adjustment for a one-for-20 reverse stock split). The
      warrants expired on July 7, 2006.




24




**Private
      Sales Transactions**




Konstantine
      (Gus) Lucas, one of our directors, currently beneficially owns approximately
      20.3% of our outstanding common stock as described under “Security Ownership of
      Certain Beneficial Owners and Management” beginning on page 22 of this Proxy
      Statement. On April 26, 2005 Mr. Lucas purchased 250,000 shares of Common Stock
      in a private placement transaction at $1.00 (post one-for-20 stock split
      adjusted) per share. In connection with the April 26, 2005 private placement,
      Mr. Lucas received a warrant to purchase 250,000 shares of Common Stock with
      an
      exercise price of $2.00 (post one-for-20 stock split adjusted) per share and
      a
      term of 30 months. On December 8, 2005 Mr. Lucas purchased 500,000 shares of
      Common Stock and warrants to purchase 500,000 shares of Common Stock from the
      Company in a private placement financing transaction for an aggregate purchase
      price of $275,000. Mr. Lucas subsequently exchanged the securities he purchased
      on December 8, 2005 for $275,000 principal amount of senior convertible notes
      and warrants to purchase 550,000 shares of Common Stock in a private placement
      financing which closed on January 9, 2006. On November 22, 2006 Mr. Lucas
      exercised his right to convert the notes into 550,000 shares of Common Stock.
      On
      January 15, 2008 Mr. Lucas purchased $216,283 principal amount of senior
      convertible notes and warrants to purchase 514,960 shares of Common Stock.




Howard
        Shapiro, a beneficial owner of more than 5% of the Company’s Common Stock,
        currently beneficially owns approximately 19.8% of our outstanding common
        stock
        as described under “Security Ownership of Certain Beneficial Owners and
        Management” beginning on page 22 of the Form 10-KSB. On January 28, 2008 Mr.
        Shapiro exercised his right to convert senior convertible notes into 330,000
        shares of Common Stock. On January 15, 2008, Mr. Shapiro purchased $400,000
        principal amount of senior convertible notes and warrants to purchase 800,000
        shares of Common Stock. On March 25, 2008, Mr. Shapiro accepted $100,000
        of
        senior convertible notes and warrants to purchase 238,095 shares of Common
        Stock
        as payment in full for short-term loans provided in the same amount. On
        March
        25, 2008, the Company issued 238,095
        restricted common shares to this investor who exercised his right to convert
        to
        common shares at $0.42 per share.




**Item
      13.**  **Exhibits.**




The
      following exhibits are included as part of this Form 10-K. References to the
      “Company” in this Exhibit List mean Phantom Fiber Corporation, a Delaware
      corporation.




**Exhibit
                Number**
            
            **Description**3.1
            
            Certificate
                of Incorporation of the Company (Incorporated by reference to Amendment
                No. 1 to the Company’s Registration Statement on Form 10-SB/A (File No.
                001-15627), filed with the Securities and Exchange Commission on
                February
                17, 2000)3.2
            
            Certificate
                of Merger of Hycomp, Inc. Into Eieihome.com Inc. filed with the Delaware
                Secretary of State on March 3, 2000 (Incorporated by reference to
                the
                Company’s Registration Statement on Form SB-2 (File No. 333-131808), filed
                with the Securities and Exchange Commission on February 13,
                2006)3.3
            
            Certificate
                of Amendment to the Company’s Certificate of Incorporation filed with the
                Delaware Secretary of State on September 26, 2000 (Incorporated by
                reference to the Company’s Registration Statement on Form SB-2 (File No.
                333-131808), filed with the Securities and Exchange Commission on
                February
                13, 2006)3.4
            
            Amended
                and Restated Certificate of Incorporation of the Company filed with
                the
                Delaware Secretary of State on October 2, 2001 (Incorporated by reference
                to the Company’s Registration Statement on Form SB-2 (File No.
                333-131808), filed with the Securities and Exchange Commission on
                February
                13, 2006)3.5
            
            Certificate
                of Amendment to the Company’s Amended and Restated Certificate of
                Incorporation filed with the Delaware Secretary of State on July
                2, 2004
                (Incorporated by reference to the Company’s Registration Statement on Form
                SB-2 (File No. 333-131808), filed with the Securities and Exchange
                Commission on February 13, 2006)3.6
            
            By-laws
                of the Company (Incorporated by reference to Amendment No. 1 to the
                Company’s Registration Statement on Form 10-SB/A (File No. 001-15627),
                filed with the Securities and Exchange Commission on February 17,
                2000)4.1
            
            Form
                of Senior Convertible Note (Incorporated by reference to the Company’s
                Form 8-K filed with the Securities and Exchange Commission on January
                10,
                2006)4.2
            
            Form
                of $1.50/$0.56 Warrants(Incorporated
                by reference to the Company’s Form 8-K filed with the Securities and
                Exchange Commission on January 10,
                2006)




25




10.1
            
            Amended
                and Restated 2000 Stock Option Plan (Incorporated by reference to
                Appendix
                A to the Company’s Preliminary Schedule 14C filed with the Securities and
                Exchange Commission on December 19, 2005)10.2
            
            2005
                Stock Option, SAR and Stock Bonus Consultant Plan (Incorporated by
                reference to the Company’s Registration Statement on Form S-8 (File No.
                333-122730) filed with the Securities and Exchange Commission on
                February
                11, 2005)10.3
            
            Subscription
                Agreement effective December 8, 2005 between Phantom Fiber Corporation
                and
                the subscribers thereto (Incorporated by reference to the Company’s 8-K
                filed with the Securities and Exchange Commission on December 14,
                2005)10.4
            
            Securities
                Purchase Agreement dated January 5, 2006 by and among Phantom Fiber
                Corporation and the investors listed on the Schedule of Buyers attached
                thereto (Incorporated by reference to the Company’s Form 8-K filed with
                the Securities and Exchange Commission on January 10,
                2006)10.5
            
            Agreements
                of December 8, 2005 investors to exchange securities (Incorporated
                by
                reference to the Company’s Form 8-K filed with the Securities and Exchange
                Commission on January 10, 2006)10.6
            
            Registration
                Rights Agreement dated January 5, 2006 by and among Phantom Fiber
                Corporation and the Buyers signatory thereto (Incorporated by reference
                to
                the Company’s Form 8-K filed with the Securities and Exchange Commission
                on January 10, 2006)10.7
            
            Transfer
                Agent Instructions dated January 4, 2006 (Incorporated by reference
                to the
                Company’s Form 8-K filed with the Securities and Exchange Commission on
                January 10, 2006)21.1
            
            Subsidiaries
                of the Company (Incorporated by reference to the Company’s Registration
                Statement on Form SB-2 (File No. 333-131808), filed with the Securities
                and Exchange Commission on February 13, 2006)14.1*
            
            Code
                of Ethics21.1
            
            List
                of Subsidiaries (Incorporated by reference to the Company’s Registration
                Statement on Form SB-2 (File No. 333-131808), filed with the Securities
                and Exchange Commission on February 13, 2006)31.1*
            
            Certification
                by Chief Executive Officer and Principal Financial Officer, required
                by
                Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act32.1*
            
            Certification
                by Chief Executive Officer and Principal Financial Officer, required
                by
                Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section
                1350 of
                Chapter 63 of Title 18 of the United States
                Code








*
      Filed
      herewith.




**Item
      14.**  **Principal
      Accountant Fees and Services.**




**Audit
      Fees**




The
      aggregate fees billed for professional services rendered by the Company’s
      principal accountants for the audit of our financial statements included in
      the
      annual report Form 10-KSB, for the reviews of the Company’s financial statements
      included in the Form 10-QSB reports, and for other services normally provided
      in
      connection with statutory filings were $86,000 and $85,072 for the years ended
      December 31, 2007 and December 31, 2006, respectively.




**Audit-Related
      Fees**




The
      Company incurred no fees for the years ended December 31, 2007 and December
      31,
      2006, for professional services rendered by its principal accountants related
      to
      the performance of the audit and review of the Company’s financial statements
      and not included in “Audit Fees.”




**Tax
      Fees**




There
      were no fees billed for professional services rendered by the Company’s
      principal accountants for tax compliance, tax advice, and tax planning for
      the
      years ended December 31, 2007 and December 31, 2006, respectively.




26




**All
      Other Fees**




The
      Company did not incur any fees for other professional services rendered by
      its
      principal accountants during the years ended December 31, 2007 and December
      31,
      2006.




**Audit
      Committee Pre-Approval Policies and Procedures**




The
      Company’s Audit Committee was formed on March 24, 2006, and consults with
      respect to audit policy, choice of auditors, and approval of any financial
      transactions that are not in the ordinary course of business. As of the date
      this report was filed with the SEC and previously the entire Board of Directors
      was responsible for such functions.




27


**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.





**Dated:**April 14, 2008
            
            
            **PHANTOM
                FIBER CORPORATION**By:Jeffrey
                T. HalloranChief
                Executive Officer, President,Principal
                Financial Officer, PrincipalAccounting
                Officer and Director





In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.





**Signature**
            
            **Title**
            
            **Date**____________________________
              Jeffrey
                T. Halloran
            
            Chief
                Executive Officer, President,Principal Financial Officer,
                PrincipalAccounting Officer and Director
            
            April
                14, 2008____________________________
              Konstantine
                (Gus) Lucas
            
            Director
            
            April
                14, 2008____________________________
              Stephen
                Gesner
            
            Director
            
            April
                14, 2008____________________________
              Dennis
                Logan
            
            Director
            
            April
                14, 2008____________________________
              Shimon
                Constante
            
            Director
            
            April
                14, 2008




28


**INDEX**




CONSOLIDATED
                  FINANCIAL STATEMENTS:Report
                  of Independent Registered Public Accounting Firm
              F
–
                  2Consolidated
                  Balance Sheets as at December 31, 2007 and 2006
              F
–
                  3Consolidated
                      Statements of Operations and Comprehensive Loss For the Years Ended
                      December 31, 2007 and 2006
              F
–
                  4Consolidated
                  Statement of Changes in Stockholders’ Deficiency For the Years Ended
                  December 31, 2006 and 2007
              F
–
                  5Consolidated
                  Statements of Cash Flows For the Years Ended December 31, 2007
                  and
                  2006
              F
–
                  6 – F – 7Notes
                  to Consolidated Financial Statements
              F
–
                  8 – F – 28




F
          -
          1


**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
        the
        Board of Directors and Stockholders of
 Phantom
        Fiber Corporation
 
 We
        have
        audited the accompanying consolidated balance sheets of Phantom Fiber
        Corporation and subsidiaries, as of December 31, 2007 and 2006 and the related
        consolidated statements of operations and comprehensive loss, changes in
        stockholders' deficiency and cash flows for the years then ended. These
        consolidated financial statements are the responsibility of the Company's
        management. Our responsibility is to express an opinion on these consolidated
        financial statements based on our audits.
 
 We
          conducted our audits in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audits to obtain reasonable assurance about whether the
          financial statements are free of material misstatement. The Company is
          not
          required to have, nor were we engaged to perform, an audit of its internal
          control over financial reporting. Our audits included consideration of
          internal
          control over financial reporting as a basis for designing audit procedures
          that
          are appropriate in the circumstances, but not for the purpose of expressing
          an
          opinion on the effectiveness of the Company’s internal control over financial
          reporting. Accordingly, we express no such opinion. An audit also includes
          examining, on a test basis, evidence supporting the amounts and disclosures
          in
          the financial statements. An audit also includes assessing the accounting
          principles used and significant estimates made by management, as well as
          evaluating the overall financial statement presentation. We believe that
          our
          audits provide a reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of Phantom Fiber Corporation
        as
        at December 31, 2007 and 2006 and the results of its operations and its cash
        flows for the years then ended in conformity with accounting principles
        generally accepted in the United States of America.
 
 As
        described in the Note 1(c), the accompanying consolidated financial statements
        have been prepared assuming the Company will continue as a going concern,
        As at
        December 31, 2007 the Company had a shareholders’ deficiency of $5,380,909 and
        reflected losses of $3,659,849 and $2,904,936 for the years ended December
        31,
        2007 and 2006, respectively. The recurring losses raise substantial doubt
        about
        the Company's ability to continue as a going concern. The consolidated financial
        statements do not include any adjustments that might result from the going
        concern assumption not being applicable.
  /s/
                  Lazar Levine & Felix LLPNew
                  York, New YorkApril
                  14, 2008
  F
            -
            2
  **Phantom
        Fiber Corporation**
  Consolidated
        Balance Sheets
 As
        at
        December 31, 2007 and December 31, 2006
  2007
              
              2006**ASSETS****Current
                  Assets:**Cash
                  and cash equivalents
              
              $
              44,642
              
              $
              29,864Accounts
                  receivable net of allowance for doubtful accounts of $21,000 for
                  2007 and
                  2006, respectively
              
              
              109,504
              
              
              35,146Marketable
                  securities available for sale
              
              
              —
              
              
              25,001Investment
                  tax credit receivable
              
              
              285,545
              
              
              376,345Prepaid
                  expenses and other receivable
              
              
              7,668
              
              
              14,026**Total
                  current assets**
              
              
              447,359
              
              
              480,382**Property
                  and Equipment – net**
              
              
              48,655
              
              
              55,289**Other
                  Assets:**Security
                  deposits
              
              
              15,020
              
              
              12,374Deferred
                  financing costs net of accumulated amortization of $538,882 and
                  $313,387
                  for 2007 and 2006, respectively
              
              
              4,717
              
              
              242,052**TOTAL
                  ASSETS**
              
              $
              515,751
              
              $
              790,097**LIABILITIES
                  AND STOCKHOLDERS’ DEFICIENCY****Current
                  liabilities:**Accounts
                  payable
              
              $
              129,628
              
              $
              56,315Accrued
                  expenses
              
              
              854,452
              
              
              578,371Accounts
                  payable and accrued liabilities to related parties
              
              
              280,262
              
              
              152,499Unearned
                  revenue
              
              
              129,229
              
              
              14,163Short
                  term borrowings
              
              
              830,000
              
              
              —Short
                  term borrowings – related party
              
              
              305,820
              
              
              —Other
                  borrowings
              
              
              182,300
              
              
              —Current
                  portion of obligations under capital leases
              
              
              14,861
              
              
              17,758Derivative
                  instruments
              
              
              354,344
              
              
              —Senior
                  convertible notes
              
              
              2,807,000
              
              
              —**Total
                  current liabilities**
              
              
              5,887,896
              
              
              819,106**Long-Term
                  liabilities:**Obligations
                  under capital leases – net of current portion
              
              
              8,764
              
              
              13,098Derivative
                  instruments
              
              
              —
              
              
              2,317,224Senior
                  convertible notes
              
              
              —
              
              
              115,299**Total
                  liabilities**
              
              
              5,896,660
              
              
              3,264,727**Commitments
                  and Contingencies****Stockholders’
                  Deficiency:**Preferred
                  stock, $0.001 par value, 10,000,000 shares authorized, none issued
                  and
                  outstanding
              
              
              **—**
              
              
              **—**Common
                    stock, $.001 par value, 400,000,000 shares authorized, 17,391,589
                    shares,
                    issued and outstanding; (16,761,089 shares, December 31,
                    2006)
              
              
              17,391
              
              
              16,761Additional
                  paid-in capital
              
              
              6,447,463
              
              
              5,619,435Accumulated
                  deficit
              
              
              (11,786,659
              )
              
              (8,126,810
              )Accumulated
                  other comprehensive (loss) income
              
              
              (59,104
              )
              
              15,984**Total
                  stockholders’ deficiency**
              
              
              (5,380,909
              )
              
              (2,474,630
              )**TOTAL
                  LIABILITIES AND STOCKHOLDERS' DEFICIENCY**
              
              $
              515,751
              
              $
              790,097
 
 See
        notes
        to consolidated financial statements.
  F
            -
            3
  **Phantom
        Fiber Corporation**
  Consolidated
        Statements of Operations and Comprehensive Loss
 Twelve
        month periods ended December 31, 2007 and December 31, 2006
  2007
              
              2006**Revenue:**Professional
                  services
              
              $
              270,027
              
              $
              155,657User
                  fees and royalties
              
              
              225,258
              
              
              153,614495,285
              
              
              309,271**Operating
                  expenses:**Research
                  and development
              
              
              919,952
              
              
              1,080,682Sales
                  and marketing
              
              
              454,884
              
              
              853,000General
                  and administrative
              
              
              871,072
              
              
              1,424,764Total
                  operating expenses
              
              
              2,245,908
              
              
              3,358,446**Operating
                  loss**
              
              
              (1,750,623
              )
              
              (3,049,175
              )**Other
                  income (expenses):**Gain
                  (loss) on disposal of marketable securities
              
              
              2,260
              
              
              (19,014
              )Gain
                  on settlement and write off of accounts payable
              
              
              —
              
              
              35,567Amortization
                  of deferred financing costs
              
              
              (538,882
              )
              
              (313,387
              )Change
                  in value of derivative instruments
              
              
              1,962,880
              
              
              1,182,776Interest
                  expense
              
              
              (375,706
              )
              
              (218,442
              )Interest
                  on accretion of senior convertible debt
              
              
              (2,935,201
              )
              
              (564,799
              )Interest
                  and other income
              
              
              5,757
              
              
              19,857(Loss)
                  gain on foreign exchange
              
              
              (30,334
              )
              
              21,681Total
                  other (expense) income – net
              
              
              (1,909,226
              )
              
              144,239**Loss
                  before provision for income taxes**
              
              
              (3,659,849
              )
              
              (2,904,936
              )Provision
                  for income taxes
              
              
              —
              
              
              —**Net
                  loss**
              
              
              (3,659,849
              )
              
              (2,904,936
              )Other
                  comprehensive income (loss):Unrealized
                  gain (loss) on marketable securities
              
              
              24,999
              
              
              (8,985
              )Foreign
                  exchange translation (loss) gain
              
              
              (100,087
              )
              
              33,711Comprehensive
                  loss
              
              $
              (3,734,937
              )
              $
              (2,880,210
              )**Net
                  Loss per share (Basic and Diluted):**Net
                  Loss per share – basic and diluted
              
              $
              (0.21
              )
              $
              (0.19
              )Weighted
                  average number of common shares outstanding
              
              
              17,134,345
              
              
              15,097,612
 
 See
        notes
        to consolidated financial statements
  F
            -
            4
  **Phantom
        Fiber Corporation**
  Consolidated
        Statement of Changes in Stockholders’ Deficiency
 December
        31, 2007 and December 31, 2006
 Common stock
                  Number (post split – seeNote 6)
                
                Common stock
                  Par Value
                
                Additional paid-in
                  capital
                
                Accumulated
                  Deficit
                
                Accumulated other
                  comprehensive
                  income (loss)
                
                Total
                  Stockholders’
                  Equity /(Deficiency)(#)
                
                ($)
                
                ($)
                
                ($)
                
                ($)
                
                ($)**Balance,
                    December 31, 2005**
                
                
                **13,890,464**
                
                
                **13,890**
                
                
                **3,811,881**
                
                
                **(5,221,874**
                **)**
                
                **(8,742**
                **)**
                
                **(1,404,845**
                **)**Fractional
                    adjustment due to stock split
                
                
                143,585
                
                
                144
                
                
                (144
                )Shares
                    issued for bonuses, services, payroll and settlement of accounts
                    payable
                
                
                2,017,415
                
                
                2,017
                
                
                837,562
                
                
                
                
                
                
                
                
                839,579Stock
                    options exercised
                
                
                20,625
                
                
                21
                
                
                6,373
                
                
                
                
                
                
                
                
                6,394Shares
                    returned per settlement agreement
                
                
                (185,000
                )
                
                (185
                )
                
                16,476
                
                
                
                
                
                
                
                
                16,291Shares
                    returned for non performance of services
                
                
                (25,000
                )
                
                (25
                )
                
                (19,975
                )
                
                
                
                
                
                
                
                (20,000
                )Warrants
                    issued
                
                
                
                
                
                
                
                
                311,094
                
                
                
                
                
                
                
                
                311,094Stock
                    based compensation expense
                
                
                
                
                
                
                
                
                207,567
                
                
                
                
                
                
                
                
                207,567Shares
                    issued for conversion of senior convertible debt
                
                
                899,000
                
                
                899
                
                
                448,601
                
                
                
                
                
                
                
                
                449,500Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                (2,904,936
                )
                
                
                
                
                (2,904,936
                )Adjustment
                    arising from increase in unrealized loss on marketable
                    securities
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (8,985
                )
                
                (8,985
                )Adjustment
                    arising from foreign exchange translation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                33,711
                
                
                33,711**Balance,
                    December 31, 2006**
                
                
                **16,761,089**
                
                
                **16,761**
                
                
                **5,619,435**
                
                
                **(8,126,810**
                **)**
                
                **15,984**
                
                
                **(2,474,630**
                **)**Shares
                    issued for services
                
                
                140,000
                
                
                140
                
                
                41,860
                
                
                
                
                
                
                
                
                42,000Warrants
                    issued
                
                
                
                
                
                
                
                
                301,547
                
                
                
                
                
                
                
                
                301,547Stock
                    based compensation expense
                
                
                
                
                
                
                
                
                239,861
                
                
                
                
                
                
                
                
                239,861Shares
                    issued for conversion of senior convertible debt
                
                
                487,000
                
                
                487
                
                
                243,013
                
                
                
                
                
                
                
                
                243,500Shares
                    issued for unpaid interest on senior convertible debt
                
                
                3,500
                
                
                3
                
                
                1,747
                
                
                
                
                
                
                
                
                1,750Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                (3,659,849
                )
                
                
                
                
                (3,659,849
                )Adjustment
                    arising from increase in unrealized loss on marketable
                    securities
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                24,999
                
                
                24,999Adjustment
                    arising from foreign exchange translation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (100,087
                )
                
                (100,087
                )**Balance,
                    December 31, 2007**
                
                
                **17,391,589**
                
                
                **17,391**
                
                
                **6,447,463**
                
                
                **(11,786,659**
                **)**
                
                **(59,104**
                **)**
                
                **(5,380,909**
                **)**
  See
        notes
        to consolidated financial statements
  F
            -
            5
  **Phantom
        Fiber Corporation**
  Consolidated
        Statements of Cash Flows
 Twelve
        month periods ended December 31, 2007 and December 31, 2006
  2007
                
                2006**Cash
                    Flows From Operating Activities**Loss
                    for the year
                
                $
                (3,659,849
                )
                $
                (2,904,936
                )Adjustments
                    to reconcile net loss to net cash used in operating
                    activities:Depreciation
                    and amortization
                
                
                554,220
                
                
                325,652(Gain)
                    loss on sale of securities
                
                
                (2,260
                )
                
                19,014Stock
                    based compensation
                
                
                239,861
                
                
                207,567Bonus
                    paid in stock
                
                
                —
                
                
                265,000Gain
                    on settlement and write off of debt
                
                
                —
                
                
                (35,567
                )Market
                    adjustment on derivative instruments
                
                
                (1,962,880
                )
                
                (1,182,776
                )Accretion
                    of interest expense (convertible notes)
                
                
                2,935,201
                
                
                564,799Common
                    stock issued for services
                
                
                42,000
                
                
                306,015Bad
                    debt expense
                
                
                (1,066
                )
                
                (19,836
                )Accounts
                    receivable settled with marketable securities
                
                
                —
                
                
                (17,500
                )Increase
                    (decrease) in cash flows as a result of changes in asset and
                    liability
                    account balances:Accounts
                    receivable
                
                
                (74,123
                )
                
                (5,189
                )Investment
                    tax credit receivable
                
                
                90,800
                
                
                (241,686
                )Prepaid
                    expenses and security deposits
                
                
                3,712
                
                
                43,236Accounts
                    payable and accrued liabilities
                
                
                478,907
                
                
                129,433Unearned
                    revenue
                
                
                115,066
                
                
                (37,800
                )Net
                    cash used in operating activities
                
                
                (1,240,411
                )
                
                (2,584,574
                )**Cash
                    Flows From Investing Activities**Proceeds
                    from the sale of marketable securities
                
                
                52,260
                
                
                5,000Purchase
                    of fixed assets
                
                
                —
                
                
                (987
                )Purchase
                    of short term investments
                
                
                —
                
                
                (516,293
                )Proceeds
                    from the sale of short term investments
                
                
                —
                
                
                516,293Net
                    cash provided by investing activities
                
                
                52,260
                
                
                4,013**Cash
                    Flows From Financing Activities**Costs
                    incurred to secure financing
                
                
                —
                
                
                (275,280
                )Issuance
                    of senior convertible notes
                
                
                —
                
                
                2,642,000Repayment
                    of capital lease obligations
                
                
                (15,104
                )
                
                (20,639
                )Proceeds
                    from short term borrowing
                
                
                1,135,820
                
                
                85,680Repayment
                    of short term borrowing
                
                
                —
                
                
                (130,851
                )Proceeds
                    from exercise of stock options
                
                
                —
                
                
                6,394Securities
                    subscriptions received
                
                
                182,300
                
                
                —Net
                    cash provided by financing activities
                
                
                1,303,016
                
                
                2,307,304**Foreign
                    currency translation (gain) loss**
                
                
                (100,087
                )
                
                33,711**Increase
                    (decrease) in cash**
                
                
                14,778
                
                
                (239,546
                )**Cash,
                    beginning of year**
                
                
                29,864
                
                
                269,410**Cash,
                    end of year**
                
                $
                44,642
                
                $
                29,864
  See
        notes
        to consolidated financial statements
  F
            -
            6
  **Phantom
        Fiber Corporation**
  Consolidated
        Statements of Cash Flows (continued)
 Twelve
        month periods ended December 31, 2007 and December 31, 2006
  2007
              
              2006**Interest
                  paid**
              
              $
              30,713
              
              **$**
              49,668**Non
                  cash transactions:**Common
                  shares issued on conversion of debenture
              
              
              245,250
              
              
              449,500Common
                  shares received for settlement of receivable
              
              
              —
              
              
              57,942Common
                  shares issued in settlement of accounts payable
              
              
              —
              
              
              446,173Stock-based
                  compensation recorded as deferred finance expense
              
              
              301,547
              
              
              187,719Property,
                  plant and equipment acquired through capital leases
              
              
              7,873
              
              
              21,416Investments
                  marked to market
              
              
              —
              
              
              8,985
 
 See
        notes
        to consolidated financial statements
  F
            -
            7
  **Phantom
        Fiber Corporation**
  Notes
        to
        the Consolidated Financial Statements
 December
        31, 2007 and 2006
  **Note
                1.**
              **Description
                  of Business and Basis of
                  Presentation**
 
 a)
              Description
                  of Business
 
 The
        business of Phantom Fiber Corporation (the “Company”) is conducted through its
        wholly-owned Canadian subsidiary Phantom Fiber Inc. headquartered in Toronto,
        Canada.
 
 The
        Company is engaged in the business of the sale and licensing of its proprietary
        wireless software platform and integration services. Phantom Fiber uses its
        software platform to extend the rich multimedia content and user experience
        of
        its customers’ existing Internet web sites securely and instantly to the
        Personal Digital Assistants (“PDA’s”) and cell phones of mobile users.
 
 Phantom
        Fiber derives its revenue from direct sales of various licensing and revenue
        sharing plans that allow its revenues to grow based upon the adoption rate
        of
        its customer’s end users.
 
 b)
              Reverse
                  Acquisition Transaction
 
 On
        July
        7, 2004, Pivotal Self-Service Technologies Inc. (“Pivotal") completed a reverse
        acquisition of privately held Phantom Fiber Corporation, an Ontario corporation.
        The merger was effected pursuant to a Share Exchange Agreement dated April
        21,
        2004 (the " Agreement") by and among the Company and Pivotal. In accordance
        with
        the terms of the Agreement, Pivotal merged with and into Phantom Fiber
        Corporation, with Phantom Fiber Corporation remaining as the surviving
        corporation.
 
 Pursuant
        to the Agreement, the outstanding shares of common stock of Phantom Fiber
        Corporation, converted into an aggregate of 8,370,537 (167,410,735 pre-split,
        see Note 6(c)) shares of the Company's common stock, which represented 64
        percent of the Company's outstanding voting stock after giving effect to
        the
        merger. An aggregate of 1,374,107 (pre-split, see Note 6(c)) shares had been
        placed in escrow for a period of one year following the date of closing of
        the
        transaction in support of indemnifications by the pre-merger stockholders
        of
        Phantom Fiber Corporation to Pivotal Self-Service Technologies Inc. The
        transaction was recorded as a reverse acquisition since the Phantom Fiber
        Corporation stockholders became the controlling stockholders of the Company.
        Accordingly, the transaction was accounted for as the issuance of stock by
        Phantom Fiber Corporation for the net monetary assets of the Company accompanied
        by a recapitalization of Phantom Fiber Corporation and no goodwill or any
        intangible assets are recorded. Based on the price of the Company's common
        stock
        on July 7, 2004 of $1.60 per share (being $0.08 per share restated for a
        1 for
        20 reverse stock split which became effective May 5, 2005), the purchase
        price
        approximated $13,393,000. In connection with the merger, the Company changed
        its
        name from "Pivotal Self-Service Technologies Inc." to "Phantom Fiber
        Corporation".
 
 Pursuant
        to the terms of the share exchange agreement between the Company and Phantom
        Fiber, upon Closing on July 7, 2004, the holders of an aggregate of CAD
        $1,200,000 (approximately $919,750) principal amount of convertible debentures
        of Phantom Fiber Corporation received warrants exercisable until the second
        anniversary of the Closing to purchase 750,000 (after consolidation of shares)
        shares of the Company's common stock at an exercise price of $1.68 per share
        (being $0.084 per share restated for a 1 for 20 reverse stock split (see
        Note
        6(c)).
 
 The
        Company also issued stock options to replace 2,000,000 Phantom Fiber Corporation
        stock options existing prior to the merger. Each stock option will allow
        the
        holder to .275 post-merger common shares (550,000 common shares in aggregate)
        for an exercise price equal to the exercise price of the Phantom Fiber
        Corporation stock options previously held divided by .275, and with an expiry
        date and vesting provisions similar to those of the previously outstanding
        stock
        options.
  F
            -
            8
  **Phantom
        Fiber Corporation**
  Notes
        to
        the Consolidated Financial Statements
 December
        31, 2007 and 2006
  **Note
                1.**
              **Description
                  of Business and Basis of Presentation
                  (continued)**
 
 c)
              Going
                  Concern and Basis of Presentation
 
 These
        financial statements have been prepared on the going concern basis, which
        assumes the realization of assets and liquidation of liabilities in the normal
        course of business, notwithstanding the continuing operating losses and the
        accumulated deficit of $11,786,659 as at December 31, 2007. The ability of
        the
        Company to continue as a going concern is dependent on the Company's ability
        to
        generate future profitable operations and receive continued support from
        its
        lenders, shareholders and raise external financing. Management recognizes
        this
        and is currently going through the process of securing additional capital
        to
        allow the company to continue operations unhindered. During 2008 management
        has
        been in discussion with a number of potential investors to provide short
        term
        and long term financing to meet the ongoing capital requirements of the Company.
        Management is currently negotiating with these investors in order to ensure
        the
        Company receives the optimal terms on these deals. Management has also taken
        measures to decrease its monthly ongoing expenses. Management’s efforts have
        also been directed towards the development and implementation of a plan to
        generate sufficient ongoing revenues to cover all of its present and future
        costs and expenses. It has amended its pricing model to increase customization
        fees and has recently secured a number of contracts which it expects will
        generate sufficient ongoing revenue to sustain its profitability. These projects
        will be integrated throughout the upcoming year. These efforts have allowed
        the
        Company to greatly reduce its ongoing losses and the Company believes it
        will be
        cashflow positive in 2008. Therefore management intends to raise sufficient
        capital to eliminate or greatly reduce its current debt and provide sufficient
        working capital to achieve ongoing profitability.
  **Note
                2.**
              **Summary
                  of Significant Accounting
                  Policies**
 
 a)
              Basis
                  of presentation
 
 The
        accompanying audited financial statements as of, and for the years ended
        December 31, 2007 and 2006, have been prepared in conformity with accounting
        principles generally accepted in the United States of America. These financial
        statements include the accounts of the Company and its wholly owned
        subsidiaries. All intercompany transactions have been eliminated on
        consolidation. Prior year financial statements have been reclassified to
        conform
        with the current year’s presentation.
 
 b)
              Use
                  of estimates
 
 The
        preparation of consolidated financial statements in conformity with accounting
        principles generally accepted in the United States of America requires
        management to make estimates and assumptions that affect the reported amounts
        of
        assets and liabilities and disclosures of contingent assets and liabilities
        at
        the date of the financial statements and the reported amounts of revenue
        and
        expenses during the year. Actual results may differ from these
        estimates.
 
 c)
              Allowance
                  for doubtful accounts
 
 The
        Company records an allowance for doubtful accounts based on specifically
        identified amounts that management believes to be uncollectible. The criteria
        for allowance provision are determined based on historical experience and
        the
        Company’s assessment of the general financial conditions affecting its customer
        base. If the Company’s actual collections experience changes, revisions to the
        allowance may be required.
 
 d)
              Revenue
                  recognition
 The
          Company recognizes software licensing revenues in accordance with all applicable
          accounting regulations, including the American Institute of Certified Public
          Accountants Statement of Position ("SOP") 97-2, "Software Revenue Recognition”,
          SOP 98-9, "Modification of SOP 97-2 Software Revenue Recognition With Respect
          to
          Certain Transactions" and Securities and Exchange Commission Staff Accounting
          Bulletin (“SAB”) 104. Following the requirements of these accounting
          pronouncements, the Company recognizes license revenues when all of the
          following conditions are met:
 F
              -
              9
  **Phantom
        Fiber Corporation**
  Notes
        to
        the Consolidated Financial Statements
 December
        31, 2007 and 2006
  **Note
                2.**
              **Summary
                  of Significant Accounting Policies
                  (continued)**
 
 ·  there
        is
        a signed license agreement with the customer;
  ·  the
        software product or defined objective has been delivered to the
        customer;
  ·  the
        amount of the fees to be paid by the customer is fixed or determinable;
        and
  ·  collection
        of these fees is probable.
  The
        Company generally negotiates formal license agreements with its customers.
        Each
        of the license agreements includes provisions for receipt of an up-front
        license
        fee and royalties. Generally, service providers pay these royalty fees either
        in
        the form of a one-time payment or as an on-going monthly fee. On-going royalties
        are recognized monthly based on the number of subscribers at month end. One-time
        royalties are recognized based on the number of new subscribers at the end
        of
        each period. . Up-front fees for consulting services are recognized as revenue
        once the product is delivered to the customer. Up-front license fees are
        recognized in the period for which the payment was intended.
 
 The
        Company may also negotiate license agreements that allow for the payment
        of the
        initial license fee to be made in future installments over a period of less
        than
        a year. Revenues recognized in advance of the installments being due are
        recorded as unbilled revenues in the balance sheet.
 
 Maintenance
        and technical support revenues are recognized ratably over the applicable
        service period, which is usually one year. Revenues derived from professional
        services are recognized upon performance of the related services. Revenues
        derived from license agreements containing multiple deliverables, such as
        product licenses, maintenance and technical support and other services, are
        allocated among the various deliverables based on the fair value of each
        deliverable. These are recognized ratably over the period as described in
        the
        contracts and may vary from customer to customer. Payments received from
        customers prior to the completion of services are recorded as unearned
        revenue.
 
 e)
              Investments
 
 The
        Company’s investment in marketable securities is classified as available for
        sale securities and is recorded at their fair value. Unrealized gains and
        losses
        are reported as a net amount in a separate component of stockholders’ equity
        until realized.
 
 f)
              Income
                  taxes
 
 The
        Company accounts for income taxes in accordance with Statement of Financial
        Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes. Under SFAS
        No. 109, deferred tax assets and liabilities are determined based on temporary
        differences between the financial statement and tax bases of assets and
        liabilities and net operating loss and credit carryforwards using enacted
        tax
        rates in effect for the year in which the differences are expected to reverse.
        Valuation allowances are established when necessary to reduce deferred tax
        assets to the amounts expected to be realized. A provision for income tax
        expense is recognized for income taxes payable for the current period, plus
        the
        net changes in deferred tax amounts (see Note 9).
 F
              -
              10
  **Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2007 and 2006
  **Note
                  2.**
                **Summary
                    of Significant Accounting Policies
                    (continued)**
 
 On
        January 1, 2007, the Company adopted Financial Accounting Standards Board
        (FASB)
        Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an
        interpretation of FASB Statement No. 109” (FIN 48). There was no impact on the
        Company’s consolidated financial position, results of operations or cash flows
        at December 31, 2007 and for the year then ended as a result of implementing
        FIN
        48. At the adoption date of January 1, 2007 and at December 31, 2007, the
        Company did not have any unrecognized
 tax
        benefits. The Company’s practice is to recognize interest and/or penalties
        related to income tax matters in income tax expense. As of January 1, 2007
        and
        December 31, 2007, the Company had no accrued interest or penalties. The
        Company
        currently has no federal or state tax examinations in progress.
 
 g)
              Financial
                  instruments
  Fair
        value
  The
        carrying values of cash, accounts receivable, marketable securities, prepaid
        expenses and other receivables, accounts payable and accrued liabilities,
        unearned revenue and short term loans approximate their fair values due to
        the
        relatively short periods to maturity of the instruments.
  The
        Company also has senior convertible notes and derivative financial instruments
        the fair value of which are estimated for disclosure purposes (below) based
        upon
        the present value of the estimated cash flows at market interest rates
        applicable to similar instruments. At December 31, 2007, estimated fair value
        and respective carrying values of the Company’s senior convertible notes and
        derivative instruments are as follows:
 
 Instrument
              
              Note
              
              Fair Value
              
              Carrying ValueConvertible
                  notes payable
              
              
              7
              
              $
              2,807,000
              
              $
              2,807,000Derivative
                  instruments
              
              
              7
              
              
              354,344
              
              
              354,344
 
 Credit
        risk
 
 Credit
        risk arises from the potential that a counter party will fail to perform
        its
        obligations. The Company’s exposure to credit risk consists principally of cash
        and accounts receivable. The Company from time to time may maintain cash
        balances which exceed the Federal Depository Insurance coverage limit. The
        Company performs reviews of the relative credit rating of its bank to lower
        its
        risk. With respect to accounts receivable, the Company constantly monitors
        its
        payments from its customers and based on payment trends determines if the
        full
        receivable will be paid. Accordingly a 100% reserve is made when there is
        doubt
        that customers will not pay the amounts due.
 
 Interest
        rate risk
 
 Interest
        rates, maturities and security affecting the interest risk of the Company’s
        financial assets and liabilities have been disclosed in notes 5, 6 and
        7.
 
 h)
              Cash
                  and cash equivalents
 
 For
        purposes of the consolidated financial statements, the Company considers
        all
        highly liquid investments with a remaining maturity of three months or less
        when
        purchased to be cash equivalents.
 F
              -
              11
  **Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2007 and 2006
  **Note
                  2.**
                **Summary
                    of Significant Accounting Policies
                    (continued)**
  i)
              Net
                  loss per share
 
 Basic
        net
        loss per share is computed by dividing net loss attributable to common
        stockholders by the weighted-average number of common shares outstanding
        for the
        period. Diluted income (loss) per share reflects the potential dilution from
        the
        exercise or conversion of other securities into common stock, but only if
        dilutive. All per share amounts reflect the effect of the 1 for 20 reverse
        stock
        split effective May 5, 2005. Diluted loss per share for the twelve months
        ended
        December 31, 2007 and 2006 is the same as basic loss per share, since the
        effect
        of including such potential common stock equivalents was anti-dilutive as
        the
        Company incurred losses for these periods. Such securities, shown below,
        presented on a common share equivalent basis and outstanding as at December
        31,
        2007 and 2006, have been excluded from the per share computations:
 
 December
                    31,2007
                
                December
                    31,2006Stock
                    Options
                
                
                176,193
                
                
                108,386Warrants
                
                
                0
                
                
                0Convertible
                    Notes Payable
                
                
                5,614,000
                
                
                6,101,000
  Basic
        and
        diluted earnings (loss) per common share was calculated for all periods in
        accordance with the requirements of Statement of Financial Accounting Standards
        No. 128, “Earnings per Share”. The following table sets forth the computation of
        the diluted loss per share for the years ended December 31, 2007 and 2006,
        respectively:
 
 For the Year EndedDecember
                    31,2007
                
                2006Numerator:Net
                    loss to common shareholders
                
                $
                (3,659,849
                )
                $
                (2,904,936
                )Adjust:Mark-to-market
                    gain-derivative liability
                
                
                (1,962,880
                )
                
                (1,182,776
                )Interest
                    on convertible debt
                
                
                2,935,201
                
                
                564,799Net
                    loss to common shareholders and assumed conversion
                
                $
                (2,687,528
                )
                $
                (3,522,913
                )Denominator:Share
                    reconciliation:Shares
                    used for basic income (loss) per share
                
                
                17,134,345
                
                
                15,097,612Effect
                    of dilutive items:Stock
                    options
                
                
                -
                
                
                -Convertible
                    securities
                
                
                -
                
                
                -Weighted
                    average shares used for diluted loss per share
                
                
                17,134,345
                
                
                15,097,612Net
                    loss per share:Basic
                    and diluted:
                
                $
                (0.21
                )
                $
                (0.19
                )
  F
              -
              12
  **Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2007 and 2006
  **Note
                  2.**
                **Summary
                    of Significant Accounting Policies
                    (continued)**
 
 j)
              Foreign
                  currency
 
 The
        functional currency of the company is the U.S. dollar and the functional
        currency of the wholly owned subsidiary located in Canada is the Canadian
        dollar. Assets and liabilities of this subsidiary are translated to U.S.
        dollars
        at year-end exchange rates and income statement items are translated at the
        average exchange rate for the year. Resulting translation adjustments, if
        material, are recorded as a separate component of accumulated other
        comprehensive income, a component of stockholders’ equity/(deficiency).
 
 k)
              Investment
                  tax credits
 
 The
        Company’s subsidiary claims credits from the Canadian government for scientific
        research and development which are earned as a percentage of eligible research
        and development expenditures incurred in each taxation year.
 
 Such
        credits earned relate to research and development expenses and property,
        plant
        and equipment purchases and are accounted for as a reduction of the respective
        expenses and the cost of such assets.
 
 l)
              Advertising
                  costs
 
 The
        Company expenses ordinary advertising and promotion costs as incurred.
        Advertising and promotion costs were $1,596 and $16,470, for the years ended
        December 31, 2007 and 2006, respectively.
 
 m)
              Comprehensive
                  income (loss)
 
 Comprehensive
        income (loss) includes the net exchange differences arising from the translation
        of Canadian dollar denominated subsidiaries into US dollars and accumulated
        unrealized holding gains and losses on the Company’s available for sale
        securities.
 
 Gain
                    (Loss) on
                  Marketable
                  Securities
                
                Foreign
                  Exchange
                  Translation
                  Gain
                    (Loss)
                
                Total
                    Gain
                  (Loss)Balance
                    January 1, 2006
                
                $
                (16,014
                )
                $
                7,272
                
                $
                (8,742
                )Realized
                    loss on sale of security
                
                
                16,014
                
                
                -
                
                
                16,014Unrealized
                    loss
                
                
                (24,999
                )
                
                -
                
                
                (24,999
                )Foreign
                    exchange translation gain
                
                
                -
                
                
                33,711
                
                
                33,711Balance,
                    December 31, 2006
                
                
                (24,999
                )
                
                40,983
                
                
                15,984Realized
                    loss on sale of security
                
                
                4,280
                
                
                -
                
                
                4,280Realized
                    loss
                
                
                20,719
                
                
                -
                
                
                20,719Foreign
                    exchange translation loss
                
                
                -
                
                
                (100,087
                )
                
                (100,087
                )Balance
                    December 31, 2007
                
                $
                -
                
                $
                (59,104
                )
                $
                (59,104
                )
 F
              -
              13
  **Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2007 and 2006
  **Note
                  2.**
                **Summary
                    of Significant Accounting Policies
                    (continued)**
  n)
              Deferred
                  financing costs
 
 Costs
        directly identifiable with the raising of debt are recorded as deferred
        financing costs. These deferred costs are amortized over the term of the
        debt
        financing to which the costs relate. Deferred financing costs consist primarily
        of corporate finance fees and legal fees. Amortization expense charged to
        operations for the years ended December 31, 2007 and 2006 was $538,882 and
        $313,387, respectively.
  o)
              Stock
                  options
 
 On
        January 1, 2006, the Company adopted SFAS No. 123(R), “Share Based Payments”
(“SFAS 123(R)”), an amendment to SFAS No. 123 “Accounting for Stock-Based
        Compensation, (“SFAS 123”), using the modified prospective method. SFAS 123(R)
        requires the Company to recognize compensation expense in an amount equal
        to the
        fair value of share based payments granted to employees. (see note
        6(d)).
  p)
              Recent
                  accounting pronouncements affecting the
                  Company:
 
 FSP
        FAS 123(R )-5, Amendment of FASB Staff Position FAS 123(R)-1:
 
 FSP
        FAS
        123(R)-5 was issued on October 10, 2006. The FSP provides that instruments
        that
        were originally issued as employee compensation and then modified, and that
        modification is made to the terms of the instrument solely to reflect an
        equity
        restructuring that occurs when the holders are no longer employees, no change
        in
        the recognition or the measurement (due to a change in classification) of
        those
        instruments will result if both of the following conditions are met:
 
 (a).
        There is no increase in fair value of the award (or the ratio of intrinsic
        value
        to the exercise price of the award is preserved, that is, the holder is made
        whole), or the antidilution provision is not added to the terms of the award
        in
        contemplation of an equity restructuring; and
 
 (b).
        All
        holders of the same class of equity instruments (for example, stock options)
        are
        treated in the same manner. The provisions in this FSP shall be applied in
        the
        first reporting period beginning after the date the FSP is posted to the
        FASB
        website. We will evaluate whether the adoption will have any impact on our
        financial statements.
 
 SFAS
        No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(SFAS No. 159)
 
 In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159 permits
        entities to choose to measure, on an item-by-item basis, specified financial
        instruments and certain other items at fair value. Unrealized gains and losses
        on items for which the fair value option has been elected are required to
        be
        reported in earnings at each reporting date. SFAS No. 159 is effective for
        fiscal years beginning after November 15, 2007, the provisions of which are
        required to be applied prospectively. The Company expects to adopt SFAS No.
        159
        in the first quarter of fiscal 2008.
 F
              -
              14
  **Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2007 and 2006
  **Note
                  2.**
                **Summary
                    of Significant Accounting Policies
                    (continued)**
 
 SFAS
        No. 141 (revised 2007), “Business Combinations” (SFAS No 141 (revised
        2007))
 
 In
        December 2007, the Financial Accounting Standards Board (“FASB”) issued
        Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised
        2007), Business Combinations , which replaces SFAS No 141. The statement
        retains
        the purchase method of accounting for acquisitions, but requires a number
        of
        changes, including changes in the way assets and liabilities are recognized
        in
        the purchase accounting. It also changes the recognition of assets acquired
        and
        liabilities assumed arising from contingencies, requires the capitalization
        of
        in-process research and development at fair value, and requires the expensing
        of
        acquisition-related costs as incurred. SFAS No. 141R is effective
        for business combinations for which the acquisition date is on or after the
        beginning of the first annual reporting period beginning on or after December
        15, 2008.
 
 SFAS
        No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS
        No 160)
  In
        December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
        Consolidated Financial Statements, an amendment of ARB 51, which changes
        the
        accounting and reporting for minority interests. Minority interests will
        be
        recharacterized as noncontrolling interests and will be reported as a component
        of equity separate from the parent’s equity, and purchases or sales of equity
        interests that do not result in a change in control will be accounted for
        as
        equity transactions. In addition, net income attributable to the noncontrolling
        interest will be included in consolidated net income on the faceof the income
        statement and, upon a loss of control, the interest sold, as well as any
        interest retained, will be recorded at fair value with any gain or loss
        recognized in earnings. SFAS No. 160 is effective for annual periods
        beginning after December 15, 2008. We are currently assessing the potential
        impact that adoption of SFAS No. 160 would have on our financial
        statements.
  SFAS
        No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS
        No. 161)
  In
        March
        2008, the Financial Accounting Standards Board (FASB) issued FASB Statement
        No.
        161, Disclosures about Derivative Instruments and Hedging Activities. The
        new
        standard is intended to improve financial reporting about derivative instruments
        and hedging activities by requiring enhanced disclosures to enable investors
        to
        better understand their effects on an entity’s financial position, financial
        performance, and cash flows. It is effective for financial statements issued
        for
        fiscal years and interim periods beginning after November 15, 2008, with
        early
        application encouraged. The company is currently evaluating the impact of
        adopting SFAS. No. 161 on its financial statements.
 
 SFAS
        No. 157, “Fair Value Measurements” (SFAS No.157)
 
 In
        September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
        which defines fair value, establishes a framework for measuring fair value
        in
        generally accepted accounting principles, and expands disclosures about fair
        value measurements. This statement does not require any new fair value
        measurements, but provides guidance on how to measure fair value by providing
        a
        fair value hierarchy used to classify the source of the information. SFAS
        No. 157 is effective for fiscal years beginning after November 15, 2007,
        and all interim periods within those fiscal years. In February 2008, the
        FASB
        released FASB Staff Position (FSP FAS 157-2 – Effective Date of FASB Statement
        No. 157) which delays the effective date of SFAS No. 157 for all
        nonfinancial assets and nonfinancial liabilities, except those that are
        recognized or disclosed at fair value in the financial statements on a recurring
        basis (at least annually), to fiscal years beginning after November 15, 2008
        and
        interim periods within those fiscal years. We are currently assessing the
        potential impact that adoption of this statement would have on our financial
        statements.
 F
              -
              15
  **Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2007 and 2006
  **Note
                  2.**
                **Summary
                    of Significant Accounting Policies
                    (continued)**
 
 EITF
        Issue No. 07-3, “Accounting for Advance Payments for Goods and Services to be
        Used in Future Research and Development (EITF 07-3)
 
 In
        June 2007, the EITF reached consensus on EITF Issue No. 07-3,Accounting for
        Advance Payments for Goods and Services to Be Used in Future Research and
        Development Activities ("EITF 07-3"). EITF 07-3 states that
        non-refundable advance payments for future research and development activities
        should be capitalized until the goods have been delivered or the related
        services have been performed. EITF is effective for fiscal years beginning
        after
        December 15, 2007. Entities are to recognize the effects of EITF 07-3
        prospectively for new contracts entered into after the effective date. The
        adoption of EITF 07-3 is not expected to have a material impact on our
        financial statements.
 
 EITF
        No. 07-1, “Accounting for Collaborative Arrangements (EITF No.
        07-1)
 
 In
        December 2007, the EITF of the FASB reached a consensus on Issue No. 07-1
        ,
        Accounting for Collaborative Arrangements ("EITF 07-1"). The EITF concluded
        on the definition of a collaborative arrangement and that revenues and costs
        incurred with third parties in connection with collaborative arrangements
        would
        be presented gross or net based on the criteria in EITF 99-19 and other
        accounting literature. Based on the nature of the arrangement, payments to
        or
        from collaborators would be evaluated and its terms, the nature of the entity's
        business, and whether those payments are within the scope of other accounting
        literature would be presented. Companies are also required to disclose the
        nature and
 purpose
        of collaborative arrangements along with the accounting policies and the
        classification and amounts of significant financial-statement amounts related
        to
        the arrangements. Activities in the arrangement conducted in a separate legal
        entity should be accounted for under other accounting literature; however
        required disclosure under EITF 07-1 applies to the entire collaborative
        agreement. EITF 07-1 is effective for annual periods beginning after
        December 15, 2007 and is to be applied retrospectively to all periods
        presented for all existing collaborative arrangements. We do not expect the
        adoption of EITF 07-1 to have a material impact on our financial
        statements.
  q)
              Property
                  and equipment
 
 Property
        and equipment are carried at cost less accumulated depreciation. Depreciation
        is
        calculated using the declining-balance method over the following lives:
 
 Useful
                  LifeComputer
                  equipment
              3
                  yearsOffice
                  furniture
              5
                  years
 
 Additions
        during the year are depreciated at one-half the usual rate.
  r)
              Research
                  and Development
 
 Research
        and development costs are expensed as incurred. Research and development
        expenses consist primarily of salaries and related personnel costs, as well
        as
        stock compensation related to these costs.
 F
              -
              16
  **Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2007 and 2006
  **Note
                  2.**
                **Summary
                    of Significant Accounting Policies
                    (continued)**
 
 s)
              Business
                  Segment and Geographic Information
 
 The
        Company operates as one segment. Approximately 95% of the Company’s revenue is
        derived from international business. The Company’s physical assets are located
        in its offices in Toronto, Canada. The Company currently has three customers
        that provided 58% and 27% of its revenue during the years ended December
        31,
        2007 and 2006, respectively. At December 31, 2007 and 2006, accounts receivable
        from these customers amounted to $40,857 and $21,364, respectively.
  **Note
                3.**
              **Marketable
                  Securities**
 
 The
        Company’s available for sale marketable securities consist of the following at
        December 31, 2006:
 **Original**
                  
                  **Fair**
                  
                  **Unrealized****Number of Shares**
                  
                  **Cost**
                  
                  **Value**
                  
                  **(Loss)**December
                      31, 2006:Midland
                      International Corporation
                  
                  
                  1,000,000
                  
                  $
                  50,000
                  
                  $
                  25,001
                  
                  $
                  (24,999
                  )$
                  50,000
                  
                  $
                  25,001
                  
                  $
                  (24,999
                  )
 
 These
        securities were sold during 2007 for cash proceeds of $52,260 and resulted
        in a
        realized gain of $2,260. There were $24,000 of unrealized losses reclassified
        out of other comprehensive income into earnings for the period.
  **Note
                4.**
              **Property
                  and Equipment**
 
 Property
        and equipment comprises the following:
 2007
                
                2006Computer
                    equipment
                
                $
                78,035
                
                $
                70,559Office
                    furniture
                
                
                29,710
                
                
                29,314107,745
                
                
                99,873Less:
                    accumulated depreciation and amortization
                
                
                (59,090
                )
                
                (44,584
                )$
                48,655
                
                $
                55,289
  Depreciation
        expense charged to operations for the years ended December 31, 2007 and 2006
        was
        $15,338 and $12,265, respectively.
 
 Included
        in the above property and equipment are computer equipment and office furniture
        under capital leases with costs of $90,258 (December 31, 2006: $82,385) and
        accumulated depreciation and amortization of  $51,379
        (December 31, 2006: $34,930). These leases bear interest at varying rates
        from
        5%-42%. The specific assets  covered
        by the  capital
        leases have been pledged as security to the leasing company until the lease
        obligation has been repaid.
  F
            -
            17
  **Phantom
        Fiber Corporation**
  Notes
        to
        the Consolidated Financial Statements
 December
        31, 2007 and 2006
  **Note
                4.**
              **Property
                  and Equipment (continued)**
  The
        future minimum payments due under these capital leases are as
        follows:
  2008
                
                $
                18,4072009
                
                
                7,5392010
                
                
                2,264$
                28,210Less
                    interest portion
                
                
                4,585Present
                    value of future lease payments
                
                
                23,625Less
                    current portion
                
                
                14,861$
                8,764
  Amortization
        expense under capital leases is included in depreciation expense and amounted
        to
        $14,030 and $11,175 for the years ended December 31, 2007 and 2006,
        respectively.
  **Note
                5.**
              **Short
                  Term Borrowings**
 2007
                
                2006Term
                    loans from unrelated parties, repayable 180 days from receipt,
                    bearing
                    interest at 10% plus 3 year warrants to purchase 1,150,000 common
                    shares
                    at $0.50 per share with registration rights of unlimited piggyback.
                    Interest rate is 15% if not repaid within the 180 days and an
                    extension
                    fee of 100,000 warrants for each $100,000 increment loaned. As
                    of December
                    31, 2007, three term loans were not paid within the 180 day period,
                    however, the investor had previously waived his right to the
                    additional
                    warrants and in January 2008 waived the additional interest.
                    In January
                    2008, $400,000 of these term loans and in March 2008 the remaining
                    $50,000
                    were settled by issuance of convertible debt as described in
                    Note
                    12.
                
                $
                450,000
                
                $
                —Term
                    loans from unrelated parties, repayable 180 days from receipt,
                    bearing
                    interest at 10%. Interest rate is 15% if not repaid within the
                    180 days.
                    In January 2008, these term loans were settled by issuance of
                    convertible
                    debt as described in Note 12.
                
                
                380,000
                
                
                —Short
                    term borrowing – related party:
                
                $
                830,000
                
                $
                —Advance
                    from a related party, repayable on demand, unsecured, bearing
                    interest at
                    21.5% per annum
                
                
                101,940
                
                
                —Advance
                    from a related party, repayable 3 months from drawdown date,
                    secured and
                    bearing interest at 2.5% per month. This advance remains outstanding
                    as of
                    March 31, 2008.
                
                
                203,880
                
                
                —$
                305,820
                
                $
                —
  **Note
                6.**
              **Capital
                  Structure**
 
 a)
              Warrants:
  The
        Company has granted 9,602,093 (post reverse split, see Note 6(c)) warrants
        to
        purchase an aggregate of 9,602,093 (post reverse split) common shares. All
        warrants are vested.
 
 F
            -
            18
 **Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2007 and 2006
  **Note
                  6.**
                **Capital
                    Structure
                    (continued)**
 
 b)
              Warrants:
  The
        composition and exercise prices of the warrants outstanding at December 31,
        2007
        are as follows:
 WeightedNumber
                
                averageof
                    warrants
                
                exercise
                    price
                
                Expiration
                    dateJanuary
                    1, 2006
                
                
                1,731,537
                
                $
                2.25
                
                
                –Warrants
                    granted
                
                
                7,983,460
                
                
                1.04
                
                
                –Warrants
                    expired
                
                
                (862,904
                )
                
                (1.96
                )
                
                –December
                    31, 2006
                
                
                8,852,093
                
                $
                1.19
                
                
                –Warrants
                    granted
                
                
                1,150,000
                
                
                0.50
                
                
                –Warrants
                    expired
                
                
                (400,000
                )
                
                (1.50
                )
                
                –December
                    31, 2007
                
                
                9,602,093
                
                $
                1.09
                
                
                –Comprised
                    of:18,633
                
                
                10.00
                
                
                March
                    6, 2008100,000
                
                
                1.10
                
                
                May
                    25, 2008300,000
                
                
                2.00
                
                
                July
                    20, 2008250,000
                
                
                4.00
                
                
                December
                    15, 2010 (a)3,891,730
                
                
                0.56
                
                
                January
                    9, 20093,891,730
                
                
                1.50
                
                
                January
                    9, 2009300,000
                
                
                0.50
                
                
                April
                    18, 2010300,000
                
                
                0.50
                
                
                May
                    18, 2010300,000
                
                
                0.50
                
                
                June
                    12, 2010150,000
                
                
                0.50
                
                
                October
                    10, 2010100,000
                
                
                0.50
                
                
                October
                    24, 20109,602,093
                
                $
                1.09
                
                
                –
  (a)
              Warrants
                  issued on December 15, 2005 to the President and Chief Executive
                  Officer
                  in connection with satisfaction of terms specified in an employment
                  agreement dated February 4, 2004.
  F
            -
            19
 **Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2007 and 2006
  **Note
                  6.**
                **Capital
                    Structure
                    (continued)**
  (c)
              Equity
                  Transactions
 
 Effective
        May 5, 2005, the Company approved a 1:20 reverse stock split. All transactions
        described below reflect the post stock split values.
 
 On
        January 9, 2006, the Company sold (a) $3,500,000 principal amount of senior
        convertible notes, and (b) warrants to purchase 7,000,000 shares of common
        stock, to 16 accredited investors. Participants in a private placement which
        closed on December 8, 2005 for gross proceeds of $858,000 exchanged the
        securities they previously purchased for an investment in the senior convertible
        notes and warrants based on the dollar amount of their prior investment,
        bringing the total gross proceeds from the transactions to $3,500,000. The
        senior convertible notes bear interest at 1% per annum payable semi-annually,
        they mature two years from the date of issuance and are convertible into
        shares
        of common stock at the investors’ option at $0.50 per share, subject to
        adjustment. The interest rate becomes 15% per annum for the period in which
        interest is overdue and reverts back to 1% when payment is made or the notes
        are
        converted into common stock. The Company has accrued $415,002 for overdue
        interest as at December 31, 2007. The warrants are exercisable until three
        years
        from the date of issuance. Half of the warrants are exercisable at a purchase
        price of $1.50 per share and the other half of the warrants are exercisable
        at a
        purchase price of $0.56 per share. The investors may exercise the warrants
        on a
        cashless basis if the shares of common stock underlying the warrants are
        not
        then registered pursuant to an effective registration statement. This
        transaction was exempt from registration pursuant to Section 4(2) of the
        Securities Act and Rule 506 promulgated thereunder.
 
 Oberon
        Securities, LLC acted as placement agent in connection with the sale of
        $2,642,000 principal amount of the senior convertible notes and related warrants
        on January 9, 2006 and was paid $224,618 cash compensation and issued 483,460
        non-assignable compensation warrants in March 2006 valued at $187,719,
        exercisable until three years after the date of issuance, with one-half of
        such
        compensation warrants entitling the holder to purchase shares of common stock
        at
        $1.50 per share and the other half of the compensation warrants entitling
        the
        holder to purchase shares of common stock at a purchase price of $0.56 per
        share. The Company also granted other placement agents in connection with
        the
        sale of $858,000 principal amount of the senior convertible notes and related
        warrants compensation in the form of 72,000 restricted shares of common stock.
        These shares were issued on June 22, 2006 and were valued at $43,200. These
        issuances were exempt from registration requirement pursuant to Section 4(2)
        of
        the Securities Act.
 
 In
        February and March, 2006, the Company issued 632,043 restricted common shares
        for the settlement of professional services, accrued payroll expenses and
        prepaid services. These services included 61,593 restricted common shares
        issued
        on February 17, 2006 for in-house accounting services, 25,000 restricted
        common
        shares were issued on March 27, 2006 for management consulting fees, 500,000
        restricted common shares were issued for accrued employee bonuses to the
        CEO for
        milestones met through 2004 and 2005, and 45,450 restricted common shares
        were
        issued on March 13, 2006 for public document filing services. These shares
        were
        valued at the fair market value on the date of grant. A total of $358,139
        was
        charged to operations with a corresponding credit to equity.
 
 On
        March
        27, 2006, the Company issued 500,000 restricted common shares to the CEO
        in
        fulfillment of a bonus stemming from previous efforts. These shares were
        valued
        at the fair market value of $0.53 per share and were charged to operations
        with
        a corresponding credit to equity.
 
 On
        February 17, 2006 a previous employee exercised his option agreement to purchase
        20,625 restricted common shares which had previously vested. A total of $6,394
        was received with a corresponding credit to equity.
  F
            -
            20
 **Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2007 and 2006
  **Note
                  6.**
                **Capital
                    Structure
                    (continued)**
  (c)
              Equity
                  Transactions (continued)
 
 In
        March,
        2006, as part of an agreement for public relations services, investor relations
        services and document filing services the Company issued warrants to purchase
        500,000 restricted common shares. The warrants which were valued at $123,375,
        range in exercise prices from $0.56 to $2.00 and expire in 1 to 10
        years.
 
 On
        June
        23, 2006, at a duly held Annual Meeting of the shareholders of the Company,
        the
        shareholders approved the authorization of 10,000,000 preferred shares. None
        of
        these shares have been issued or are outstanding.
 
 On
        June
        27, 2006, for full and final consideration of a receivable owing in the amount
        of approximately $54,575 and a payable of $70,866, the Company accepted the
        return of 185,000 common shares of the Company which were then returned to
        the
        transfer agent and removed from circulation.
 
 On
        June
        27, 2006, the Company returned 25,000 shares of its common stock to the transfer
        agent and they were removed from circulation. The shares were being held
        as
        final payment for consulting services originating from an agreement signed
        in
        August, 2005. The agreement has expired and therefore the shares have been
        returned to the transfer agent.
 
 In
        September 2006, as part of an agreement to settle amounts due for legal services
        of $14,240, the Company recorded the issuance of 17,800 shares.
 
 In
        November 2006, the Company issued 899,000 restricted shares to senior
        convertible debt holders who exercised their right to convert to common shares
        at $0.50 per share.
 
 In
        December 2006, as part of an agreement for public relations services valued
        at
        $159,000, the Company issued 600,572 restricted shares and 195,000 unrestricted
        shares.
 
 In
        February 2007, the Company issued 80,000 unrestricted common shares as part
        of
        an agreement for document filing services for the next twelve months. The
        shares
        were valued at the market price at date of issuance aggregating
        $21,600.
 
 In
        February and March, 2007, the Company issued 265,000 unrestricted common
        shares
        to senior convertible debt holders who exercised their right to convert to
        common shares at $0.50 per share.
 
 In
        April,
        May, June and July 2007, the Company issued a total of 1,150,000 warrants
        to
        purchase common shares at $0.50 per share. The warrants were issued as part
        of
        the cost of financing short term loans from an unrelated party and valued
        at
        $301,547 in the aggregate.
 
 In
        June
        2007, the Company issued 22,000 unrestricted common shares to senior convertible
        debt holder who exercised their right to convert to common shares at $0.50
        per
        share.
 
 In
        September 2007, the Company issued 203,500 unrestricted common shares at
        $0.50
        per share, in exchange for the conversion of $100,000 in senior convertible
        debt
        and $1,750 of unpaid interest.
 
 In
        October 2007, the Company issued 60,000 as part of an agreement for investor
        relation services. The shares were valued at $20,400.
 
 F
            -
            21
 **Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2007 and 2006
  **Note
                  6.**
                **Capital
                    Structure
                    (continued)**
  (d)
              Share
                  – Based Payments:
 
 In
        connection with the Reverse Acquisition described in note 1(b), the Company’s
        stock option plan was amended to increase the number of options to be issued
        under the plan from a maximum of 150,000 (post reverse split, see Note 6(c))
        options to a maximum of 2,000,000 (post reverse split) options.
 
 Effective
        January 1, 2006, the Company’s Plan is accounted for in accordance with the
        recognition and measurement provisions of Statement of Financial Accounting
        Standards ("FAS") No. 123 (revised 2004), Share-Based Payment ("FAS 123(R)"),
        which replaces FAS No. 123, Accounting for Stock-Based Compensation, and
        supersedes Accounting Principles Board Opinion ("APB") No. 25, Accounting
        for
        Stock Issued to Employees, and related interpretations. FAS 123 (R) requires
        compensation costs related to share-based payment transactions, including
        employee stock options, to be recognized in the financial statements. In
        addition, the Company adheres to the guidance set forth within Securities
        and
        Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 107, which
        provides the Staff's views regarding the interaction between SFAS No. 123(R)
        and
        certain SEC rules and regulations and provides interpretations with respect
        to
        the valuation of share-based payments for public companies.
 
 In
        adopting FAS 123(R), the Company applied the modified prospective approach
        to
        transition. Under the modified prospective approach, the provisions of FAS
        123
        (R) are to be applied to new awards and to awards modified, repurchased,
        or
        cancelled after the required effective date. Additionally, compensation cost
        for
        the portion of awards for which the requisite service has not been rendered
        that
        are outstanding as of the required effective date shall be recognized as
        the
        requisite service is rendered on or after the required effective date. The
        compensation cost for that portion of awards shall be based on the grant-date
        fair value of those awards as calculated for either recognition or pro-forma
        disclosures under FAS 123.
 
 The
        Company's results for the year ended December 31, 2007 include share-based
        compensation expense totaling approximately $239,861. Of this amount, $110,656
        represents the expense related to options granted to employees. The options
        were
        granted on July 14, 2006 and the vesting period ranges from immediately to
        3
        years. These amounts have been included in the Consolidated Statements of
        Operations within operating expenses. No income tax benefit has been recognized
        in the income statement for share-based compensation arrangements due to
        a
        history of operating losses
 
 Stock
        option compensation expense in 2007 is the estimated fair value of options
        granted amortized on a straight-line basis over the requisite service period
        for
        the entire portion of the award.
 F
              -
              22
  **Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2007 and 2006
  **Note
                  6.**
                **Capital
                    Structure
                    (continued)**
  (d)
              Share
                  – Based Payments (continued):
 
 During
        2007, the Company took into consideration guidance under FAS 123(R) and SEC
        Staff Accounting Bulletin No. 107 (SAB 107) when reviewing and updating
        assumptions. The expected volatility is based upon historical volatility
        of our
        stock and other contributing factors. The expected term is based upon
        observation of actual time elapsed between date of grant and exercise of
        options
        for all employees. The fair value of options granted during the twelve month
        periods was estimated using the Black-Scholes option pricing model with the
        following assumptions:
  Year endedDecember 31,2007
              
              Year endedDecember 31,2006Expected
                  term (in years)
              
              4.00
              
              1.33 to 3.50Expected
                  stock price volatility
              
              130% to 133%
              
              113% to 157%Risk
                  free interest rate
              
              4.13% to 4.54%
              
              4.76% to 5.29%Expected
                  dividend yield
              
              0%
              
              0%
 
 A
        summary
        of the changes in the Company’s stock option plan for the years ended December
        31, 2007 and December 31, 2006 is as follows:
  Number
                    ofshares
              
              Weightedaverageexercise
                  price
              
              WeightedAverageRemainingContractualTerm(years)
              
              AggregateIntrinsicValueBalance
                  at January 1, 2006
              
              
              567,500
              
              $
              0.41
              
              
              3.43
              
              $
              62,282Options
                  granted
              
              
              1,641,862
              (a)
              
              0.51
              
              
              5.65
              
              
              —Options
                  cancelled
              
              
              (285,266
              )
              
              0.61
              
              
              —
              
              
              —Options
                  exercised
              
              
              (20,625
              )
              
              (0.31
              )
              
              —
              
              
              —Balance
                  at December 31, 2006
              
              
              1,903,471
              
              
              0.47
              
              
              4.78
              
              $
              62,282Options
                  granted
              
              
              376,857
              
              
              0.50
              
              
              5.65
              
              
              —Options
                  cancelled
              
              
              (319,725
              )
              
              0.52
              
              
              —
              
              
              —**Balance,
                  December 31, 2007**
              
              
              **1,960,603**
              
              
              **0.47**
              
              
              **4.49**
              
              
              **33,600****Exercisable,
                  December 31, 2007**
              
              
              **932,442**
              
              **$**
              **0.42**
              
              
              **3.07**
              
              **$**
              **33,600**
 
  (a)
        The
        fair value of the 1,641,862 employee stock options granted during the year
        ended
        December 31, 2006 was $487,193. As of December 31, 2007, there was $84,216
        of
        unamortized compensation costs, net of estimated forfeitures, related to
        non
        vested stock options, which is expected to be recognized over a weighted
        average
        period of approximately 1.75 years.
  F
            -
            23
 **Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2007 and 2006
  **Note
                  6.**
                **Capital
                    Structure
                    (continued)**
  (d)
              Share
                  – Based Payments (continued):
 Exercise
                  Price
                
                Number
                  of
                    options
                  outstanding
                
                Average
                  remaining
                  life
                    (years)
                
                Weighted
                  average
                  exercise
                  price
                
                Weighted
                  Number
                  of
                    options
                  exercisable
                
                Weighted
                  average
                  exercise
                  price$
                0.23
                
                
                409,750
                
                
                1.12
                
                $
                0.23
                
                
                409,750
                
                $
                0.230.50
                
                
                730,846
                (a)
                
                4.37
                
                
                0.50
                
                
                284,894
                
                
                0.500.51
                
                
                795,007
                (b)
                
                4.99
                
                
                0.51
                
                
                212,798
                
                
                0.512.00
                
                
                25,000
                
                
                3.66
                
                
                2.00
                
                
                25,000
                
                
                2.00$
                0.23
                  - 2.00
                
                
                1,960,603
                
                
                4.49
                
                $
                0.47
                
                
                932,442
                
                $
                0.42
  (a)
              Reflects
                  225,000 options issued on May 1, 2006 to an employee and 505,846
                  options
                  were issued to directors.
 (b)
              Options
                  issued on July 14, 2006 to employees and directors.
  **Note
                7.**
              **Senior
                  Convertible Notes**
 
 On
        December 8, 2005, the Company received subscriptions of $858,000 for the
        sale of
        1,560,000 shares of common stock and warrants from accredited investors.
        The
        common stock and warrants were sold as units, with each unit consisting of
        one
        share of common stock and a warrant to purchase one share of common stock,
        for a
        per unit purchase price of $0.55. Each warrant entitles the holder to purchase
        one share of common stock at $1.10 per share, exercisable for a period of
        three
        years. Each of the investors had the right to exchange their units for any
        equity securities or other security which may be sold by the Company during
        the
        period ending 45 days after closing of the transaction. Each of the investors
        exercised their right to exchange their units for securities sold by the
        Company
        in a private placement (see below) which closed on January 9, 2006. The rights
        to the warrants described in this note were also exchanged in favor of warrants
        attached to the January 9, 2006 financing. At December 31, 2005 these funds
        were
        recorded as securities subscriptions pending completion of the January 5,
        2006
        transaction.
 
 On
        January 5, 2006, the Company entered into a Securities Purchase Agreement
        with
        accredited investors for the sale of (i) $3,500,000 principal amount of senior
        convertible notes (the “notes”) and (ii) warrants to purchase up to 7,000,000
        shares of common stock. The sale of the senior convertible notes and warrants
        closed on January 9, 2006. Participants in the private placement which closed
        on
        December 8, 2005 for gross proceeds of $858,000 exchanged the securities
        they
        previously purchased for an investment in the senior convertible notes and
        warrants based on the dollar amount of their prior investment, bringing the
        total gross proceeds from this private placement to $3,500,000.
 
 The
        notes
        totaling $3,500,000 have a stated maturity date of January 9, 2008 with an
        option to the holder to extend the date in case of an event of default (as
        specified) and on change of control as defined. These notes are convertible
        into
        common shares at $0.50 with a reset provision to 75% of the conversion rate
        in
        the event that certain performance targets and stock price levels specified
        in
        the notes agreement are not met by December 31, 2006. The notes are redeemable
        earlier at the option of the holder in case any of the specified events of
        default occur or on change of control. The redemption amount is to be calculated
        in accordance with the formula specified in the notes agreement. The notes
        bear
        interest at 1% per annum. The
        interest rate becomes
        15% per annum for the period in which interest is overdue and reverts back
        to 1%
        when payment is made or the notes are converted into common stock. The
        Company has accrued $35,083 representing the 1% interest due and $379,919
        for
        overdue interest at 14% per annum as of December 31, 2007.  The
        notes also have two separate warrants to purchase common stock of the Company.
        Warrant A entitles the holders to purchase up to 3,500,000 common shares
        at
        $1.50 per share and Warrant B entitles the holders to purchase up to 3,500,000
        common shares at $0.56 per share. These warrants are exercisable until January
        9, 2009.
  F
            -
            24
 **Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2007 and 2006
  **Note
                  7.**
                **Senior
                    Convertible Notes
                    (continued)**
 
 The
        Company paid $241,730 cash compensation to the placement agent and a lawyer
        in
        connection with the sale of $2,642,000 principal amount portion of the senior
        convertible notes and related warrants and issued 483,460 non-assignable
        compensation warrants exercisable until three years after the date of issuance,
        with one-half of such compensation warrants entitling the holder to purchase
        shares of common stock at $1.50 per share and the other half of the compensation
        warrants entitling the holder to purchase shares of common stock at a purchase
        price of $0.56 per share. The Company also compensated other placement agents
        and a lawyer in connection with the sale of the $858,000 principal amount
        portion of the senior convertible notes and related warrants, compensation
        in
        the form of 72,000 restricted shares valued at $43,200.
 
 Registration
        Rights Agreements require the Company to register and maintain the registration
        of the shares underlying the aforementioned notes and the warrants. The Company
        will incur cash penalties if it fails to do so.
 
 The
        Company has accounted for the conversion option in the notes as an embedded
        derivative under the provisions of FAS 133: Accounting
        for Derivative Instruments and Hedging Activities. Pursuant to the provisions
        of
        Statement of Financial Accounting Standards No. 133, and EITF 00-19: “Accounting
        for Derivative Financial Instruments Indexed to, and Potentially Settled
        in, a
        Company's Own Stock” (“EITF 00-19”), the Company has recorded initially the
        value of the warrants and conversion option at $3,042,290 and $2,983,856,
        respectively. As the proceeds of the notes of $3,500,000 are less than the
        combined fair value of the warrants and the conversion option, the initial
        difference of $2,526,146 has been charged to interest expense on derivative
        instruments, a non-operating expense, in the consolidated statements of
        operations. The note is determined to have no value and has been recorded
        with a
        debt discount of $3,500,000, the value of the notes. The debt discount is
        being
        amortized using the effective interest rate method over the life of the
        underlying debt accordingly; the effective interest rate for the debt is
        507%.
        The cash paid of $300,720, the value of the warrants of $211,519 and the
        shares
        issued of $43,200 to the private agents and lawyers have been accounted as
        deferred financing cost and the warrants have been accounted as additional
        paid
        in capital. The deferred financing costs are being amortized on a straight
        line
        basis over the life of the underlying convertible note.
 
 The
        Company revalued the conversion option and the warrants as of December 31,
        2007
        at $0 and $354,344, respectively. During the twelve months ended December
        31,
        2007, the Company has recorded income of $1,962,880 from the change in value
        of
        these derivative instruments. Conversions during 2007 amounted to $243,500 resulting in an outstanding
        principal balance of $2,807,000 as at December 31, 2007.
  **Note
                8.**
              **Related
                  Party Transactions**
 
 Included
        in accounts payable and accruals to related parties is an amount of $164,596
        ($137,671 – December 31, 2006) due to an officer for unpaid compensation due to
        the officer. Also included in accrued liabilities to related parties at December
        31, 2007 is an amount of $36,542 owing to a company directly controlled by
        the
        spouse of the CEO for consulting services rendered. The Company incurred
        consulting fees of $46,836 in 2006. The remaining amount owing as of December
        31, 2007 is $36,541.
 
 A
        person
        related to the CEO provided the Company with a short term loan amounting
        to
        $101,940, unsecured, payable upon demand and bearing interest at 21.5% per
        annum. This same person also provided a second short term loan for $203,880,
        secured by accounts receivables and a general security agreement, with a
        term of
        3 months from drawdown date and interest of 2.5% per month. The Company recorded
        interest expense of $79,124 on these borrowings during the year ended December
        31, 2007.
  F
            -
            25
 **Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2007 and 2006
 **Note
                9.**
              **Income
                  Taxes**
 
 The
        Company files US Federal income tax returns for its US operations. Separate
        income tax returns are filed, as locally required, for each of its foreign
        subsidiaries.
 
 There
        was
        no benefit from income taxes for the years ended December 31, 2007 and 2006
        as
        the Company’s net loss carryforward are fully offset with a valuation
        allowance.
 
 The
        total
        provision for income taxes differs from that amount which would be computed
        by
        applying the income tax rate to income (loss) before provision for income
        taxes.
        The reasons for these differences are as follows:
  2007
                
                2006Amount
                
                %
                
                Amount
                
                %Statutory
                    income tax rate (recovery)
                
                $
                (1,321,900
                )
                
                (36
                )
                $
                (1,049,300
                )
                
                (36
                )Non-deductible
                    items and temporary differences
                
                
                636,400
                
                
                17
                
                
                988,300
                
                
                35Other,
                    including valuation
                  Allowance
                    adjustment
                
                
                685,500
                
                
                19
                
                
                61,000
                
                
                1Net
                    taxes (recovery) and effective rate
                
                $
                —
                
                
                —
                
                $
                —
                
                
                —
 
 
 The
        Company recognizes deferred tax liabilities and assets for the expected future
        tax consequences of temporary differences between the carrying amounts and
        the
        tax basis of assets and liabilities and net operating loss carry-forwards.
        Temporary differences and carry-forwards, which give rise to deferred tax
        assets
        and liabilities are as follows:
 2007
                
                2006Component
                
                Tax
                    Effect
                
                Component
                
                Tax
                    EffectNet
                    operating losses – domestic
                
                $
                3,919,000
                
                $
                1,333,000
                
                $
                2,392,000
                
                $
                813,000Less
                    valuation allowance
                
                
                (3,919,000
                )
                
                (1,333,000
                )
                
                (2,392,000
                )
                
                (813,000
                )Net
                    deferred tax asset
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                —Net
                    operating losses – foreign
                
                $
                9,638,000
                
                $
                3,481,000
                
                $
                7,326,000
                
                $
                2,646,000Less
                    valuation allowance
                
                
                (9,638,000
                )
                
                (3,481,000
                )
                
                (7,326,000
                )
                
                (2,646,000
                )Net
                    deferred tax asset
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                —
 As
        December 31, 2007, the Company had cumulative net operating loss carry-forwards
        of approximately $3,919,000 and $9,638,000 in the United States and Canada
        respectively. These amounts will expire in various years through 2028. The
        related deferred tax assets have been completely offset by a valuation
        allowance. The Company has no significant deferred tax liabilities.
  F
            -
            26
 **Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2007 and 2006
  **Note
                  10.**
                **Accrued
                    liabilities**
  The
        composition of accrued liabilities is as follows:
 
 2007
              
              2006Professional
                  fees
              
              $
              252,263
              
              $
              260,871Director
                  compensation
              
              
              38,529
              
              
              69,583Interest
                  on senior convertible debt
              
              
              415,002
              
              
              194,891Salary
                  and related costs
              
              
              34,264
              
              
              36,252Payroll
                  taxes
              
              
              48,151
              
              
              0Other
              
              
              66,243
              
              
              16,774Total
              
              $
              854,452
              
              $
              578,371
  The
        Company is delinquent in the remittance of payroll taxes withheld to the
        proper
        authorities as of December 31, 2007 and through the date of issuance of these
        financial statements.
  **Note
                11.**
              **Commitments**
  (a)
              The
                  Company leases its corporate executive office in Toronto, Canada
                  and a
                  sales office in Costa Rica under operating leases which expire
                  in various
                  years through October 31, 2009. In addition, the Company has an
                  office in
                  New York which it rents on a monthly basis for $285 per month.
                  The future
                  minimum payments under these leases for each of the years ended
                  December
                  31, and in the aggregate are as
                  follows:
  2008
                  
                  $
                  89,0002009
                  
                  
                  40,000$
                  129,000
  Rent
        expense (including other charges) charged to operations for the years ended
        December 31, 2007 and 2006 amounted to $143,116 and $128,787,
        respectively.
 
 (b)
              Under
                  an employment agreement dated February 4, 2004, Jeff Halloran was
                  engaged
                  as President and Chief Executive Officer at an annual base salary
                  of
                  $250,000 per annum, plus other benefits including a monthly car
                  allowance
                  of $500 and a monthly office expense allowance of $500. Should
                  thecompany
                  choose to terminate the employment agreement, Mr. Halloran is entitled
                  to
                  receive two times his base salary. All outstanding options are
                  to
                  immediately vest and all extended health care premiums will remain
                  in full
                  effect for a one-year period. Mr. Halloran is required to enter
                  into a
                  non-compete agreement with the
                  Company.
  **Note
                  12.**
                **Subsequent
                    Events**
  In
            January 2008, the Company issued 330,000 unrestricted common shares to
            a senior
            convertible debt holder who exercised his right to convert to common shares
            at $0.50 per share.
  In
        January 2008, the Company negotiated short term financing of $50,000. Interest
        of 10% per annum is payable upon expiry of the note or repayment date. The
        term
        of the loan is 180 days from receipt with interest of 15% should repayment
        not
        be made within this time frame.
  On
            January 15, 2008, the Company issued (a) $973,583 principal amount of
            new senior
            convertible notes, and (b) warrants to purchase 2,165,674 shares of common
            stock, to 7 accredited investors. These convertible notes were utilized
            to pay
            other borrowings received amounting to $182,300, the settlement of short
            term
            loans payable of $780,000 and settlement of director dividends payable
            in the
            amount of $11,283. The senior convertible notes bear interest at 1% per
            annum
            payable semi-annually. The notes mature two years from the date of issuance
            and
            are convertible into shares of common stock at the investors’ option at $0.50
            per share for one investor and $0.42 per share for the remaining investors,
            subject to adjustment. The warrants are exercisable until three years
            from the
            date of issuance at a purchase price of $0.50 per share. This transaction
            was
            exempt from registration requirement pursuant to Section 4(2) of the
            Securities
            Act and Rule 506 promulgated there under.
 
 F
            -
            27
 **Phantom
          Fiber Corporation**
  Notes
          to
          the Consolidated Financial Statements
 December
          31, 2007 and 2006
  **Note
                  12.**
                **Subsequent
                    Events (continued)**
  On
        January 31, 2008, the Registrant concluded the negotiations for the extension
        of
        its Senior Secured Note and on February 11, 2008, the final agreements were
        delivered to the Holder. The amendments are to its outstanding Senior Unsecured
        Note (the “Amended Note”) in the principal amount of $2,642,000 originally
        entered into on January 6, 2006. The Holder of the Amended Note, Victory
        Park
        Master Fund, Ltd., (the “Holder”) agreed to an extension of the due date until
        May 31, 2008. In exchange for waiving interest due and any technical defaults
        of
        the original Registration Rights Agreement and in exchange for the extension
        of
        the due date and the cancellation of the Class A Warrants to purchase up
        to
        2,642,000 $0.001 par value common stock of the Registrant for an exercise
        price
        of $1.50 per share, the Registrant agreed to issue 900,000 restricted common
        shares to the Holder. The agreements also provide for the early prepayment
        of
        the Amended Note at a discount under certain circumstances. The revised interest
        rate of the Amended Note is 12% annually and the amendment also provides
        for the
        Holder to be granted a security interest in all of the Registrant’s
        assets.
  On
        February 11, 2008, certain employees exercised their option agreement to
        purchase 90,749 restricted common shares which had previously vested. The
        options were exercised at $0.228 per share
  On
          March
          25, 2008, the Company issued (a) $100,000 principal amount of senior convertible
          notes, and (b) warrants to purchase 238,095 shares of common stock, to
          an
          accredited investor. These convertible notes were utilized to pay $50,000
          of
          short term borrowings existing as of December 31, 2007 and an additional
          $50,000
          of short term borrowings received in January 2008. The senior convertible
          notes
          bear interest at 1% per annum payable semi-annually. The notes mature on
          January
          15, 2010 and are convertible into shares of common stock at the investors’
option at $0.42 per share, subject to adjustment. The warrants are exercisable
          for three years from the date of issuance at a purchase price of $0.50
          per
          share. This transaction was exempt from registration requirement pursuant
          to
          Section 4(2) of the Securities Act and Rule 506 promulgated there under.
  On
        March
        25, 2008, the Company issued 238,095 restricted common shares to this investor
        who exercised his right to convert to common shares at $0.50 per
        share.
  F
            -
            28